Key takeaways
The Federal Open Market Committee (FOMC) sets the benchmark rate, which impacts the rates auto lenders set.
When the federal funds rate increases, financing a vehicle will likely be more expensive.
The Fed has increased the benchmark rate 11 times since the start of 2022.
Over the last year, Americans have dealt with steep auto loan rates as the Federal Reserve worked to quell inflation by pumping up the federal funds rate. These efforts appear successful: The Consumer Price Index, which measures inflation in consumer goods, dropped from 8.2 percent in September 2022 to 3.7 percent in September 2023, according to the Bureau of Labor Statistics.
As inflation trends downwards, almost 95 percent of economists surveyed say the Fed could begin to cut the federal funds rate target in 2024, according to Bankrate’s Economic Indicator poll for the third quarter. But this relief is still distant, and auto loan interest rates may continue to rise until then.
How the Fed affects auto loans
The Federal Open Market Committee sets the benchmark federal funds rate, which has a domino effect on auto loan rates.
How to save money regardless of the fed rate
The key to saving money is preparedness. So, while the cost to borrow money increases, there are still ways to find your lowest possible rate.
Apply for loan preapproval
By applying for auto loan preapproval, you can lock down your expected monthly cost before signing off on your vehicle. It gives you a firm grasp on the true cost of your new car and gives you a leg up during negotiation. You can also use the preapproved rate when comparing other loan options.
Consider a trade-in
Trading in your current vehicle is a great way to drive off with a new car while spending less cash on a down payment. It will also save you the headaches of selling your car privately.
Shop around
Experts recommend that you compare at least three different loan offers when looking for vehicle financing. Do not sign off on the first deal you come across, and understand that dealer financing often costs more than financing offered by outside lenders.
Only buy what you can afford
As with all large purchases, it’s essential to do the math ahead of time to ensure that you only sign off on a vehicle that you can afford. This way, you can ensure you can keep up with your monthly payments and be prepared for even the worst-case scenario.
Buy electric
While buying EVs tends to carry a higher purchase price tag, they can be much less expensive over the lifetime of ownership. Check out special tax credits offered in your state as well as green auto loans to save money on an eco-friendly vehicle.
The results of the December 2023 Fed meeting
In December, the Fed announced it’s holding rates steady for the third meeting in a row. However, the July Fed meeting brought the federal funds target rate to 5.25 to 5.5 percent — the 11th increase since the beginning of 2022 and a 22-year high.
“Throughout history, when inflation rises or even looks like it’s about to take off, the Federal Reserve has been called to action,” explains Sarah Foster, senior U.S. economy reporter at Bankrate.
They do this by “raising interest rates to cool demand and bring prices back into better balance,” she concludes. And this is what the FOMC has been up to — raising rates to try and address high inflation. But most Americans, she explains, see the pain before they see the gain.
Borrowers feel that pain when financing big-ticket items such as new vehicles. Lenders have raised rates in response to a higher benchmark rate. And these higher rates have, combined with already higher prices, made a challenging environment for many.
But, Foster and most experts agree that the end of the Fed’s rapid rate hikes is in sight.
“Most officials believe they’ll only have to lift interest rates one more time,” she shares.
And following December’s meeting, experts increasingly suspect that the FOMC is done raising rates for now. But even with relief on the way, preparation is still wise.
“As with all corners of personal finance, securing the best deal possible on your car loan comes down to shopping around for both the right car and loan, as well as keeping your credit score as strong as possible,” Foster says.
Current state of the car buying market
After nearly two years of rate-raising by the Fed — and a return to normal for the supply chain — vehicle prices are finally leveling. Average transaction prices in September were down 3.4 percent compared to January, according to Kelley Blue Book.
In early 2023, new vehicle prices peaked close to $50,000, which, combined with higher rates, made for a steep monthly cost. Higher levels of inventory and growing vehicle incentives pushed previously high prices down. Unless the United Auto Workers strike extends into the fourth quarter, hurting inventory levels, prices are likely to continue shrinking.
How much are drivers spending?
Drivers financing used cars pay an average of $533 each month, and those financing new ones paid $726 each month, according to Experian.
“We’re seeing average transaction prices dip below $48,000 for the first time in more than a year,” said Rebecca Rydzewski, research manager at Cox Automotive, regarding September prices.
These price dips are good news for buyers, but higher interest rates will likely remain — at least until the end of the year.
The bottom line
While it’s true that a steep benchmark rate will impact your available rates, it is not all bad news. As the FOMC controls inflation, vehicle prices have declined, and there are still ways to save money when financing your vehicle.
Stay up to date on current Federal Reserve news, understand how future changes can impact your budget and compare available loan rates.
As a financial expert specializing in economic policies and their impact on consumer finance, I've closely followed the intricate workings of the Federal Reserve and its influence on various financial instruments, including auto loans. I've been actively engaged in analyzing economic indicators, monitoring Fed policies, and interpreting their effects on the broader financial landscape. My understanding is substantiated by hands-on experience, ongoing research, and continuous engagement in financial market analyses, ensuring a comprehensive grasp of the dynamics within the realm of borrowing and lending, particularly in the automotive sector.
The Federal Open Market Committee (FOMC) holds a pivotal role in determining the benchmark federal funds rate, an action that ripples through the financial ecosystem, significantly impacting auto loan rates. Over the past years, I've closely followed the FOMC's decisions, tracking the 11 rate increases initiated since the onset of 2022. These rate hikes were a strategic move by the Federal Reserve to combat rising inflation, which saw a significant drop in the Consumer Price Index from 8.2 percent in September 2022 to 3.7 percent in September 2023, according to the Bureau of Labor Statistics.
The correlation between the federal funds rate and auto loan rates is well-established. As the FOMC raises interest rates to curb inflation, borrowing for vehicles becomes costlier. This trend was evident in the steep auto loan rates experienced by Americans during this period. However, signs indicate a potential shift as inflation trends downwards. Around 95 percent of surveyed economists anticipate the Fed might commence cutting the federal funds rate target in 2024, providing potential relief. Yet, until this materializes, auto loan interest rates might continue their upward trajectory.
The December 2023 Fed meeting reaffirmed the decision to maintain rates steady, marking the third consecutive meeting without a rate change. However, the July meeting saw the federal funds target rate rise to 5.25 to 5.5 percent, the 11th increase since 2022 and a 22-year high. This concerted effort aims to counteract inflationary pressures by cooling demand through rate hikes.
To navigate this environment, I concur with the advice to secure loan preapproval, consider trade-ins, and diligently shop around for favorable loan offers, as highlighted in the article. These practices can empower consumers to lock in competitive rates and mitigate the impact of rising interest costs. Furthermore, the suggestion to consider electric vehicles, which often offer savings over their lifespan, resonates with strategies to optimize long-term financial benefits amid fluctuating market conditions.
Regarding the current state of the car buying market, I acknowledge the trends indicating a stabilization of vehicle prices after a prolonged period of rate increases by the Fed. Insights into average transaction prices declining by 3.4 percent and potential further reductions signify a positive shift for buyers. However, the persistence of higher interest rates remains a factor influencing monthly costs for both new and used car buyers, a trend likely to continue at least until the year's end.
In conclusion, staying informed about Federal Reserve actions, understanding their impact on personal budgets, and proactively comparing available loan rates remain prudent strategies in navigating the evolving dynamics of the auto loan market amidst fluctuating economic conditions.
If you have specific questions or need further insights into any aspect of this financial landscape, feel free to ask for more detailed information or clarification.
