Drivers who are looking to finance a new or used vehicle in the coming year can expect a gradual increase in interest rates, but average rates are still expected to remain below 5 percent.

“Rates for auto loans haven’t been very rate sensitive in recent years, and this was especially true in the 2015-2019 cycle of Fed rate hikes,” says Bankrate Chief Financial Analyst Greg McBride, CFA. “Competition among lenders means much the same will play out this time. Rates will move up, but not quite as much as the Fed hikes rates.”

What happened to auto loan rates in 2021

The past year saw a lot of volatility in the auto market due to low inventory and international supply chain issues, but auto loan rates followed a fairly steady decline. The national average rate for a 60-month new auto loan started the year at 4.24 percent and dropped to 3.92 percent by Dec. 15, according to Bankrate data. Drivers looking to purchase used were also met with a decrease. Rates on a 36-month used vehicle loan began at 4.53 percent and closed the year at 4.39 percent, while 48-month used vehicle loans dropped from 4.79 percent to 4.54 percent.

These low rates were largely due to the Fed’s push to keep rates down within a recovering economy. With that said, increased consumer demand meant record-high vehicle prices, so even though the cost to borrow money saw a decrease in 2021, many drivers were and still are struggling to even find a vehicle to finance.

Rates are expected to gradually increase in 2022 amid continuing supply chain issues

McBride warns that rates are expected to drift higher in the next year, predicting that by the end of 2022 the average interest rate on a five-year new car loan will be 4.4 percent and the average rate for a four-year used car loan will be 4.85 percent.

He explains that the main catalyst for driving up interest rates over 2022 is the Federal Reserve raising benchmark rates. Following the stimulus that the economy needed during the early stages of the pandemic, the Fed will be raising benchmark rates to lower inflation incurred during that time. These benchmark rates directly impact the cost that drivers pay to borrow money for their loans.

While McBride’s predictions signal a relatively small rate increase, ongoing supply chain issues may offset any savings you’ll find in a low-rate environment. The global chip shortage continues to impact vehicle availability, and U.S. inventory is down dramatically — as much as 65 percent compared to the beginning of the year, according to the National Automobile Dealers Association. This translates to more expensive vehicles and fewer deals at the dealership.

“A moderate rate increase is minor compared to the supply issue,” McBride says. “And if it continues to persist throughout 2022, many drivers will be met with frustration.”

Next steps for consumers

The truth is, there is no perfect time to purchase a car, and a lack of vehicle inventory makes it challenging to find a good deal even when rates are low. However, you can still prepare by shopping around and improving your credit score.

To find the best deal on your car purchase:

  • Stay current on credit card and loan payments — a history of timely payments boosts your credit score, which will qualify you for lower interest rates.
  • Shop around with a few auto loan lenders to see which offers you the best deal.
  • Time your car purchase to align with any seasonal deals dealerships may still offer.
  • Be flexible; with less inventory, you may need to come prepared with backup car colors or models.
  • Expand your search to several dealerships and research MSRPs before you head in for a test drive.

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