The Looming Used Car Crunch of 2025: A Perfect Storm of Shortages and Tariffs

The automotive market is bracing for a potentially turbulent 2025, particularly for those in the used car sector. Factors are converging to create a perfect storm, threatening to drive up prices and limit choices for consumers seeking affordable transportation. This isn’t just a matter of tariffs; a confluence of events set in motion during the COVID-19 pandemic is set to drastically alter the used car landscape.

The root of the problem lies in the new car sales slump of 2022. Production lines were hampered by supply chain disruptions and microchip shortages, leading to historically low new car sales. This seemingly temporary dip is now poised to have a ripple effect on the used car market, specifically impacting the availability of the highly sought-after three-year-old vehicles.

Why are three-year-old cars considered the "gold standard" of used automobiles? They represent a sweet spot where depreciation has significantly lowered the price, yet the vehicle still boasts many miles of reliable service. Typically, these cars are past their initial rapid depreciation phase, offering a more attractive value proposition compared to newer models, while still retaining a substantial portion of their lifespan. This combination of affordability and remaining useful life makes them incredibly popular among used car buyers.

However, in 2025, the number of these ideal three-year-old vehicles will be significantly reduced. Edmunds, a leading car shopping resource, forecasts that 2025 will be a particularly challenging year for finding these nearly-new used cars. The underlying cause is the paltry 13.8 million new car sales recorded in 2022. This figure represents the lowest sales volume since 2011, when the nation was still recovering from the economic fallout of the Great Recession.

Brian Moody, Executive Editor of Kelley Blue Book and Autotrader, confirms this looming shortage, stating that the impact of the COVID-19 era is finally coming to fruition.

The decrease in leased vehicles returning to the market in 2025 is a significant contributor to the overall used car scarcity. The number of new car leases declined sharply in 2022, directly impacting the supply of off-lease vehicles three years later. Edmunds predicts that leased vehicles will only account for a mere 18% of used car sales in 2025, representing the lowest level since the Great Recession.

In recent years, between 2019 and 2022, the annual volume of used vehicles returning from leases consistently exceeded 4 million. However, Edmunds anticipates this number to plummet to around 2 million this year, signifying a dramatic reduction in available inventory. This shortfall is primarily because fewer cars were leased in the first place. The reduced supply of leased returns compounds the overall scarcity of used vehicles in the market.

Furthermore, Edmunds forecasts a general shortage of "gently used" vehicles in 2025. Ivan Drury, Director of Insights at Edmunds, emphasizes that the inventory of two, three, and four-year-old cars will be markedly lower.

These vehicles, aged two to four years, consistently experience strong demand. Many are still covered by their original manufacturer’s warranty, offering buyers added peace of mind. Moreover, the initial depreciation has already occurred, making these cars a comparatively attractive financial proposition.

This inventory squeeze is hitting the market at a particularly unfortunate time. New car prices remain stubbornly high. In January, the average price of a new vehicle reached a near-record $48,118. In contrast, the average used vehicle was priced at a more moderate $24,402, making the prospect of finding an affordable used car increasingly important for budget-conscious consumers.

Adding to the market’s woes, tariffs introduced previously are further complicating the automotive landscape. These tariffs, enacted on imported vehicles and parts, threaten to inflate prices across the board.

A significant portion of new vehicles sold in the U.S. are manufactured outside the country. Data indicates that 17% of new vehicles sold this year were built in Mexico, 7% in Canada, and 27% in other foreign countries. Even vehicles assembled within the United States often rely on parts sourced from overseas.

While a temporary exemption for automobiles was put in place for a limited time, the looming threat of tariffs continues to cast a shadow over the automotive industry. The potential impact of these tariffs remains a concern, and the uncertainty contributes to market volatility.

The introduction of tariffs could disproportionately affect the affordability of entry-level vehicles. According to automotive experts, a substantial percentage of vehicles priced under a certain threshold could be directly impacted by these tariffs. This would make new cars even more expensive and potentially drive more consumers towards the used car market.

David Bennett, manager of repair systems at AAA, believes that tariffs might not directly impact used car prices as much unless the price difference between new and used cars widens, thus increasing the demand and price of used cars.

Reduced dealer incentives, such as discounts and low-interest financing offers, are another potential consequence of tariffs. Automotive experts suggest that these incentives might become less prevalent as manufacturers grapple with increased costs.

Given the expected scarcity of gently used vehicles, consumers entering the market in 2025 may need to consider alternative options.

Traditionally, a five-year-old car was considered to be on the cusp of needing significant repairs. However, Ivan Drury points out that vehicle durability has greatly improved over the years, meaning that vehicles are generally lasting longer than they used to.

While the supply of used cars might be constrained overall, there could be more inventory available at the higher end of the market. Luxury vehicles accounted for a relatively large proportion of new car sales in recent years. Since luxury vehicles tend to depreciate more rapidly than lower-priced alternatives, they could offer attractive value for consumers who are willing to consider an older model.

Buying a used electric vehicle (EV) is another possibility, given the rapid depreciation typically observed in the EV market. This depreciation can make gently used EVs surprisingly affordable compared to their new counterparts.

Ivan Drury suggests that the prices of gently used cars and trucks will be so high in 2025 that they may approach the prices of new cars.

New cars may even represent a better value proposition in some instances.

Dealers often offer discounts on new car prices, and auto loan interest rates tend to be lower for new vehicles. Special promotional interest rates might also be available.

In contrast, the average interest rate for a used car loan is significantly higher, further eroding the potential cost savings of buying used.

Alex Knizek, Associate Director of auto test development at Consumer Reports, suggests that while the assumption that buying used is always cheaper than new is intuitive, this might not always be the case in the current market conditions. The combination of factors at play makes this a critical time for potential car buyers to carefully weigh their options and explore all available avenues before making a decision.