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.

Auto Car
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 January 2024 Fed meeting

In January, the Fed announced it’s holding rates steady for the fourth 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. 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.

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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.