Industry Voices | Vehicle Affordability in 2025: Challenges, Predictions and Opportunities

In recent years, vehicle affordability has become a pivotal issue in the automotive industry, and as we approach 2025, this topic is more pressing than ever. Key factors, including production volumes, incentives, rising MSRPs and shifting market strategies continue to shape the financial landscape for manufacturers, dealers and consumers. Looking at the way this year has unfolded, we can predict the state of vehicle affordability in 2025, gaining insights into the challenges and potential solutions the industry may adopt.

One major takeaway from 2024 is the persistent disconnect between production plans and actual sales. Automakers produced significantly more vehicles than the market could absorb, resulting in inflated inventories. In 2024, production outpaced sales by approximately 600,000 units, leading to an overstock of vehicles on dealership lots.

This imbalance brought about several undesirable outcomes. Increased incentives became necessary for moving excess inventory, cutting into automakers’ profitability. Dealers were also forced to slash prices, which eroded their margins. Additionally, the reliance on incentives hurt vehicle residual values – a critical factor in leasing and trade-ins – making overproduction a cascading issue across the industry.

Incentive spending, while still below pre-pandemic levels, reached approximately $3,000 per unit, up from their minimal levels during the pandemic supply chain crisis. While such spending may have helped to sustain sales, it highlighted deeper systemic issues, with overproduction being the most prominent.

Sales Predictions for 2025: A Slight Uptick

Early expectations for 2025 sales suggest a modest increase of a few hundred thousand from the estimated 15.8 million units that will be sold in 2024. Several factors are expected to contribute to this growth. Lower interest rates are likely to make vehicle financing slightly more affordable for consumers. Continued increases in dealer and manufacturer incentives will boost consumer confidence and encourage purchases. Stabilization of the broader economic environment, including inflation, may also improve affordability and motivate buyers.

Despite these improvements, rising vehicle prices and diminished trade-in values are expected to offset many of these gains from the car buyer’s point of view. These dynamics will limit the overall impact of the anticipated improvements in affordability.

Rising Costs and Monthly Payments

Consumers experience affordability primarily through monthly car payments. J.D. Power data show record-high monthly payments despite favorable trends in some areas, such as interest rates and increasing incentives. Monthly finance payments ended November at $740 per month, an increase of $15 from November 2023 and $158 more costly than November 2019.

Monthly payments are up despite declining new-vehicle transaction prices, net of manufacturer incentives and dealer discounting. So, what gives? Other economic pressures have more than canceled out those gains. Rising MSRPs are a significant factor contributing to this financial strain, and trade-in values for used vehicles have declined, eroding consumers’ purchasing power. The result is an affordability crisis that continues to challenge consumers and the industry alike.

Implications for 2025

New-car dealers will likely continue to face intense pressure in 2025 as automakers shift more of the financial burden onto them. Dealers have already been on the front lines of discounting strategies, with profitability shrinking as a result. As inventories rise and pricing pressures mount, dealers may struggle to maintain their margins. Automakers, meanwhile, have been slower to adjust their pricing strategies, further straining dealer profitability. These dynamics are expected to create a challenging environment for dealerships in the coming year.

The 2025 landscape will test automakers’ ability to adapt to a competitive and evolving market. Automakers that fail to address affordability challenges risk losing market share to more adaptable competitors. To succeed, car manufacturers must rein in production, reintroduce and emphasize lower trims, and use targeted incentives rather than blanket discounts. These approaches will not only improve profitability but also ensure that consumers have access to more affordable options.

As we move in the second half of the decade, vehicle affordability will remain a complex issue for the automotive industry. Rising MSRPs, declining trade-in values and the absence of entry-level vehicles present significant challenges for consumers, dealers and manufacturers. However, by better aligning their portfolios with consumer demand, automakers can strike a balance between profitability and accessibility. A commitment to affordability will not only benefit consumers but also ensure the long-term sustainability of the automotive market.