By Imani Moise

People are rushing to dealerships to buy cars before tariff price increases, but that doesn't mean they can get financing.

Large auto lenders such as Wells Fargo and Capital One have tightened their standards over the past few years, meaning more people are getting rejected as demand rises. And some firms have tightened further in the past few months.

Ally Financial, for example, received a record 3.8 million loan applications in the first quarter of 2025, but it approved fewer borrowers than the prior quarter. Credit Acceptance, which offers financing to borrowers with lower credit scores, said it is retrenching after seeing signs that newer borrowers are struggling to keep up with payments.

Capital One is making more auto loans than it did a year ago, but executives say they are staying selective about whom they lend to. More than half of the bank's auto loans went to borrowers in the highest credit tier last quarter.

"We are still leaning in, but it's with a very watchful eye with respect to this uncertain economy," Capital One Chief Executive Richard Fairbank said on a call with analysts last week.

Auto lenders are still recovering from a period of upheaval in the car market during the pandemic, when soaring prices pushed them to make larger loans. Many borrowers later fell behind on payments, and banks and other lenders tightened standards.

During the pandemic some car owners, unable to afford new vehicles, held on to their vehicles longer or bought older used cars. Now, the average trade-in age has climbed to near decade highs, according to Edmunds. Consumers are re-entering the market with older vehicles that lenders are less willing to accept as collateral, another hiccup in getting financing.

The White House earlier this week eased tariffs in the auto sector by offering discounts on duties for automakers that build vehicles in the U.S. But auto executives say the underlying cost pressures remain. The policies are expected to raise new car prices by thousands of dollars, even for vehicles assembled in the U.S., as parts and production costs climb.

Meanwhile, dealers and consumers are racing to get ahead of price hikes. Ford, for example, said auto sales rose 16% in April from a year earlier.

"The easiest thing to do was to just go sooner than later," said Ivan Drury, director of insights at Edmunds.

Higher vehicle values make financing a riskier business for lenders because inflated prices mean borrowers end up with larger loans that take longer to pay off. Borrowers can owe more than the car is worth for longer, especially if values fall. If lenders have to repossess the car, they might take a bigger loss.

Auto lending executives on earnings calls drew parallels between today's rising prices and the pandemic-era run-up in vehicle values when chip shortages and shipping delays pushed new inventory to historic lows. Those higher prices pushed many buyers to the sidelines, only to return now to face an even less affordable market for new cars. Interest rates are now higher.

For those looking to finance a car purchase, it helps to have a good credit score. Roughly 38% of auto loans were extended to borrowers with credit scores of 760 or higher in the fourth quarter of 2024, versus 33% three years earlier, according to Federal Reserve data.

Those with lower scores or first-time borrowers should consider lining up a cosigner or loan from a credit union before walking into a dealership, Drury said.

The average APR on new car loans was 7.2% in April, up from 5.4% at the end of 2019. More borrowers are stretching loan terms to 84 months or longer to keep monthly payments manageable, according to Edmunds.

Even with high rates, those who pass on buying now might find prices have risen even more down the road.

"It's a choose-your-own-adventure kind of crazy," Drury said.

Write to Imani Moise at imani.moise@wsj.com

(END) Dow Jones Newswires

May 03, 2025 07:00 ET (11:00 GMT)

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