The Federal Reserve is a complex facet of the American economic system. At what’s typically eight meetings a year, the Fed determines how much it costs to borrow money. One of its jobs is setting a benchmark interest rate for short-term consumer lending, which private lenders use to set their own rates. If the Fed raises the federal funds rate at one of its meetings, you can expect to pay more for a personal loan or auto loan.
How Fed rates affect auto loans
The choices discussed by the Federal Open Market Committee (FOMC) during Fed meetings are not the exact interest rates consumers will be offered; rather, they impact the cost for banks to lend to each other. Because of this, banks and lenders may change the rates they offer to consumers when the federal funds rate changes. When the Fed raises interest rates, auto loan rates may rise as well, or vice versa.
Why Fed meetings are important
Fed meetings are important because they allow anyone to have a transparent look into the economy — more specifically, the manner in which interest rates change and are expected to shift. If the Fed announces that it is raising interest rates, you can expect to encounter more expensive loans or see interest rates rise on any variable-rate loans you already have.
The FOMC releases a statement after every meeting, which you can review to keep up to date.
How to prepare for future Fed rate changes
Preparation is the key to saving money. In order to be best prepared, educate yourself on the current federal funds rate and how shifting rates may impact your wallet. The federal funds rate and auto loan rates aren’t the same, but there is a domino effect that reaches the lenders, which then impacts your rates.
Although the current federal funds rate dictates the general range of auto loan rates available, your credit score still serves as the primary factor in determining the amount you pay. To receive a loan with the most favorable terms, you must have a prime credit score (typically 660 and above) and good credit history. The federal funds rate is out of your control, but you can take action to improve your credit score to prepare for future vehicle financing.
When the Fed adjusts rates, available auto loan rates may change as well. For instance, in a struggling economy, the Fed may choose to lower the federal funds rate, and auto loan rates could lower in response. If the Fed raises rates, it could be more expensive to take out a loan.
Keep in mind that although the Fed’s decisions impact your auto loan, the rate that you will receive is primarily determined by your own financial history. Regardless of how the federal funds rate changes, you can set yourself up for the cheapest loans by working to improve your credit score and finances. It’s also good to keep up to date on current loan rates before going for a new auto loan.