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 — as they did at the most recent June meeting — you can expect to pay more for a personal or auto loan.
How Fed rates affect auto loans
Auto loan rates are dictated by the time of year, the type of vehicle, the borrower’s credit score and more. But the Fed sets the benchmark rate on which auto loan lenders base their rates.
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.
June 2022 Fed rate change
In response to the economic disruptions caused by the pandemic, the central bank aims to control inflation through a rate hike. Following the June Fed meeting, the U.S. central bank made one of its most aggressive moves since the ‘90s aiming to control current sky-high inflation.
The updated target range for the federal funds rate is set at 1.50-1.75 percent. Now, as explained, this number does not control auto rates directly. Rather, it is tied to the prime rate. Simply, this steep rate increase means that vehicle financing could cost you more money. But lenders do still hold power when it comes to the amount charged to borrowers based on a driver’s credit history.
But Sarah Foster, senior U.S economy reporter at Bankrate, notes that right now it is just an expensive time to purchase a vehicle — with or without this rate hike.
“The Federal Reserve raising interest rates this year is just one factor that’s likely going to make buying a car more expensive.” The combined factors of the chip shortage and the pandemic caused sky-high prices for new and used vehicles through 2021 and into 2022.
But this rate hike isn’t all bad for drivers, Foster says, “If you’re looking for a glimmer of hope, higher rates could be a good thing for those thinking about buying a car, especially if it causes demand to balance back out with supply. A receding pandemic could also boost manufacturing. All of that means that vehicle prices in 2022 could come down, even though rates are going back up.”
Why Fed meetings are important
Fed meetings are important because they allow anyone to have a transparent look into the economy — more specifically, the way 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.
Check out Bankrate’s Federal reserve hub to see how the FOMC could impact you and your money.
How to prepare for future Fed rate changes
Preparation is the key to saving money. 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 affects 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 improve your credit score to prepare for future vehicle financing.
When the Fed adjusts rates, available auto loan rates may change as well. 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, set yourself up for the best auto loan rate by working to improve your credit score and finances. It’s also good to keep up to date on current loan rates before applying for a new auto loan.