The automotive industry is at a crossroads.
After the chaos of the last few years – COVID-19, supply chain shortages and raging inflation – it’s becoming clearer than ever that the business model adopted by most automakers in the 2010s is not sustainable. It’s not sustainable environmentally. And it’s not sustainable financially.
We have long known that automakers’ push to get consumers into ever-bigger and ever-more-expensive gasoline-powered vehicles isn’t good for the environment. Transportation is America’s number one source of the greenhouse gas emissions that are warming the planet, with most of those emissions coming from cars, pickups, vans and SUVs. But until recently, there were few practical alternatives for Americans who need to drive.
That is now beginning to change.
More than 800,000 electric vehicles (EVs) were sold in the U.S. in 2022 – a 65% increase over 2021. Tesla remains the industry leader – delivering a record number of vehicles in 2022 – but other automakers are starting to break into the scene.
Just as EVs are starting to make inroads, however, the business model that has delivered high profits for automakers over the past decade – a business model dependent on household borrowing to finance the purchase of big trucks and SUVs – has run into trouble.
The party’s over
During the 2010s, low interest rates and extended loan repayment periods enabled auto dealers to sell bigger cars while still maintaining reasonable monthly payments. At the same time, some lenders relaxed their standards for who could get a loan, leading to an increase in auto lending to consumers with subprime credit.
The result, as we documented in our 2019 report Driving into Debt, was a meteoric rise in the auto debt being taken on by Americans. The total auto debt owed by American consumers rose  from $0.7 trillion in the first quarter of 2010 to $1.35 trillion in the first quarter of 2020 (not adjusted for inflation), with auto debt rising most rapidly for low-income borrowers.
During the COVID-19 pandemic, loan forbearance and fiscal stimulus put money in people’s pockets. Auto loan originations spiked, even as automakers skewed production toward high-margin vehicles and prices rose.
Now, however, the bill for the last decade of auto buying is starting to come due. Today, Americans hold $1.58 trillion in auto loan debt  – more than ever before – and delinquency rates are higher than previous peaks during the Great Recession.
At the same time, higher interest rates and automakers’ continued obsession with big, expensive vehicles mean that buying a car is becoming much more expensive. Many loans now have APRs of 5-7%, even if you have great credit. The average monthly payment for a loan on a new vehicle reached $725 in the first quarter of 2023, an 11.5% increase over the first quarter of 2022. Although fewer auto loans are being originated today than in 2021, people who are still taking them out are taking out larger loans than in the past.
For those consumers with less-than-sterling credit, meanwhile, it’s become harder to get a loan at all. In response to rising delinquency rates, lenders are tightening their standards. And even when loans are available, used-car buyers with subprime credit could be looking at an APR of 18.5%, stretching the bounds of affordability.
The implications of all this for consumers – at least in the short run – are clear. People can expect to pay more for a car, if they can afford one at all.
But it’s also important to ask what this means for the automakers’ other sustainability challenge: the transition to electric vehicles.
Old dogs, new tricks
Many automakers seem to be aiming to follow Tesla’s model of introducing EVs as primarily luxury vehicles, but whether that model can work for them as well as it did for Tesla isn’t clear.
With the hospitable macroeconomic environment of the pre-pandemic period now a thing of the past, most consumers can’t take on as much debt to finance a new vehicle as they might have in the end of the 2010s, which could make it more difficult for automakers to market expensive EVs.
Churning out expensive pickups and SUVs that happen to be electric may seem to make the industry more environmentally sustainable, but if it’s also going to be sustainable for consumers, automakers will need to do more than simply switch what’s under the hood.
Many Americans think of EVs as expensive, likely in part because most of the electric vehicles currently available are SUVs and large cars. Indeed, most EVs launched last year were in the luxury tier, with starting price points out of range for most Americans.
But a closer look reveals a different reality: some models are rapidly closing the price gap between new gasoline-powered vehicles and new EVs. For example, a 2024 Honda Accord – historically one of the most popular midsize car models in America – has a starting price of $28,990. In comparison, taking into account the $7,500 federal tax credit, the Tesla Model 3 now starts at $31,490. The 2023 Chevy Bolt starts at just $26,500.
Thus there are two different things happening in the EV market at the same time. On the one hand, Tesla is chopping prices in hopes of marketing its cars to a wider range of people. On the other hand, most new EV models hitting the market from legacy automakers are high-end rides like the Ford F-150 Lightning and the GMC Hummer EV.
It’s too soon to say which of these strategies will win out, but signs point to affordability taking on increased importance in an era of high interest rates and more constrained family budgets. Some of the best-selling and most-lauded EVs in 2022 were relatively small, relatively affordable models like Tesla’s Model 3 sedan and the fan-favorite Chevy Bolt hatchback, which is one of the cheapest EVs on the market.
The Bolt is a great example of how automakers and consumers are misaligned on envisioning the electric future. It has sold remarkably well in recent years and is well rated by industry experts. Nevertheless, GM planned to phase it out, because it doesn’t fit the company’s long-term EV strategy. The Bolt assembly plant was set to transition to electric pickups. The car’s soaring popularity, however, finally convinced GM to reverse course and keep the Bolt alive.
Perhaps that will be a sign to automakers that, by choice or as a result of changing circumstances, consumers are losing interest in big, expensive pickups and SUVs, whether electric or not. If we want to speed the transition to electric vehicles – and make sure that each of those vehicles is as friendly to the environment and the climate as it can possibly be – a transition to smaller, more affordable vehicles can only help.
The cheap-money-fueled SUV frenzy of the last decade has incurred a huge debt – a financial debt that households are paying off right now, and a debt of climate damage that will be paid by future generations. The shift from running up debt to paying it off is painful. But it also gives us a chance to envision a future for transportation that is more sustainable – in every sense of the word.
 This source is an interactive page. To access the data referenced, select the second chart on the right.
Policy Associate, Frontier Group
Abigail is a policy associate with Frontier Group. Abigail lives in Quincy, Massachusetts, where she enjoys long walks and reading on the beach.
Director, Don't Sell My Data Campaign, PIRG; Policy Analyst, Frontier Group
R.J. focuses on data privacy issues and the commercialization of personal data in the digital age. Her work ranges from consumer harms like scams and data breaches, to manipulative targeted advertising, to keeping kids safe online. In her work at Frontier Group, she has authored research reports on government transparency, predatory auto lending and consumer debt. Her work has appeared in WIRED magazine, CBS Mornings and USA Today, among other outlets. When she’s not protecting the public interest, she is an avid reader, fiction writer and birder.