The United States’ decision to impose 25% tariffs on imported vehicles from Mexico, Canada, and Europe has raised significant concerns for the European motor finance sector. As vehicle prices rise and demand declines, auto lenders across Europe must navigate a complex financial landscape, balancing risk management with maintaining access to credit for consumers and businesses.
The tariffs are expected to raise the cost of European vehicles exported to the US, leading to higher loan amounts and increased financial strain on borrowers. This could result in higher default rates and reduced loan originations, directly impacting European lenders that finance vehicle purchases. According to GlobalData’s Jeff Schuster, the US light vehicle market could shrink by up to one million units annually, reducing demand for auto finance products.
Analysis by consultants Kearney, highlights that the financial consequences for European manufacturers and suppliers will be severe, with potential revenue losses of between $3.2 billion and $9.8 billion. The knock-on effects will ripple through the motor finance sector, as lenders face a decline in financing opportunities and potential risk exposure to manufacturers struggling with tariff-related losses.
Rising prices and consumer demand
Higher vehicle prices could make car financing less accessible to consumers, potentially leading to fewer new loans and leases. Kearney’s analysis underscores the role of price elasticity in demand: a 10% price increase could reduce demand for combustion-engine vehicles by 5–10%, while demand for EVs could decline by as much as 30%. If the full cost of tariffs is passed on to consumers, demand for European imports in the US could fall by 60,000 to 185,000 units, with revenue losses reaching up to $13.7 billion.
For European motor finance companies, this decline in demand translates into lower lending volumes, creating downward pressure on profitability. Additionally, lenders may need to tighten credit conditions to mitigate the increased risk of defaults, further limiting access to vehicle financing.
Challenges for leasing and fleet financing
European leasing and fleet finance providers, which rely on stable vehicle demand and predictable residual values, face additional risks. With automakers adjusting production strategies and shifting pricing models, the resale value of vehicles in leasing agreements could become more volatile. This uncertainty complicates risk assessment for leasing firms and could lead to higher financing costs or reduced leasing activity.
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By GlobalData
Suppliers, who are integral to the European automotive financing ecosystem, also face significant disruption. Kearney estimates that supplier revenue losses could reach up to $7.3 billion, with profitability declines of 3–13%. This financial strain could impact supplier-backed financing solutions, particularly those supporting business and fleet customers.
Production shifts and strategic responses
One potential mitigation strategy is shifting production to the US, where automakers have underutilized capacity. GlobalData notes that some manufacturers may also increase prices on non-tariffed vehicles to offset losses. However, these strategies require significant investment and time to implement, leading to near-term financial uncertainty for both manufacturers and auto lenders.
The auto finance sector may need to adapt by offering longer loan terms or flexible payment plans to help consumers manage higher vehicle costs. Additionally, automakers and lenders could explore subsidised financing rates or incentives to sustain sales volumes.
Broader economic consequences
The tariffs come at a time when the automotive industry is already grappling with economic headwinds, including the transition to electric vehicles, rising interest rates, and global supply chain challenges. As Reuters reports, shares in European carmakers fell sharply, with Stellantis and Volkswagen down 6.8% and 5.6%, respectively. The broader European automobiles and parts index retreated by 3.7%, underscoring market concerns.
As GlobalData’s Jeff Schuster warns, “Consumers are expected to pay for most of the cost of any tariffs implemented.” The European motor finance sector now faces a fresh period of uncertainty, requiring innovative strategies while ensuring vehicle financing remains accessible to consumers and businesses.
