Americans have been met with price increases at the supermarket, gas pumps and dealer lots over the past year. As the Federal Reserve works to quell the inflation incurred from the pandemic, there will be some growing pains hitting all facets of borrowing — auto loans included — while the Central Bank helps the economy return to normal.

In September, the Fed announced that it’s holding rates steady. 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.

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How the Fed affects auto loans
The Federal Open Market Committee (FOMC) sets the benchmark rate, which is what auto lenders base their rates on.

How to save money regardless of the fed rate

The key to saving money is preparedness. So, while vehicle prices remain high and the cost to borrow money increases, there are still ways to get ahead and save money.

Apply for loan preapproval

By applying for auto loan preapproval, you can lock down your expected monthly cost prior to 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 when it comes to 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 the cost differentiation that comes with dealer financing versus that found from other lenders.

Only buy what you can afford

As with all large purchases, it’s important 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 September 2023 Fed meeting

The buzz around recent Fed meetings focused on managing inflation. Sarah Foster, senior U.S. economy reporter at Bankrate, explains that “The Fed is fast-tracking its hikes to borrowing costs as consumers feel the biggest inflationary hit to their purchasing power in 40 years.” With the benchmark rate remaining at a target range of 5.25-5.5 percent, Americans are going to feel the effects in a way that they have not had to deal with since the early ’90s.

“Policymakers haven’t hiked interest rates by more than the standard quarter-point multiple times in one year since 1994,” Foster says. “And when it’s all said and done, the Fed could end up hiking rates this year by the most since the ’80s. All of that means Fed policy won’t be remembered this year by how many rate hikes — but by how many percentage points rates rise.”

May and July’s moves were smaller than 2022’s hikes, only a quarter of a percentage point rise. While there was no hike in September, the Fed has raised rates a total of 11 times during this economic cycle.

High inflation adds pressure to an already tight market. The increased benchmark rate is only a single factor in why buying a car is so expensive right now. “Higher auto loan rates are just an added tax on top of already-high price pressures and supply chain bottlenecks that have sent the price of both new and used cars soaring,” Foster says.

But Foster does present some encouragement, “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.”

Current state of the car buying market

Drivers looking to purchase vehicles right now have to deal with high prices and sparse vehicle inventory. Kelley Blue Book reported that new vehicle costs surpassed $48,000 in August 2022, hitting a fifth straight month of record-high prices.

Drivers financing used cars paid $528, and those financing new ones paid $729 each month, according to Experian. The cost to purchase used vehicles was also up about 6 percent compared to June 2021, according to Kelley Blue Book price data.

Rising inflation is only one factor that has led to increased vehicle costs. The vehicle industry is still working to catch up with the profound impacts brought on by the microchip shortage and widespread inventory issues. Fortunately, indicators do show that vehicle production should return to pre-pandemic levels soon. Waiting to purchase could be worth your while.

On top of this, drivers are dealing with much more than just expensive vehicles. According to AAA, gas prices have reached record highs, surpassing $5 per gallon as recently as June 14 – up nearly 50 percent in the past year. Unfortunately, the timeline for gas prices returning to normal is mostly unknown due to how much of it is affected by the Russia-Ukraine war.

This all culminates in an especially challenging time for the multitude of Americans who do not have the luxury of waiting for inflation to subside before making a vehicle purchase as vital to their life as transportation, explains Foster.

The bottom line

While it’s true that a steep benchmark rate will tangentially impact your available rates, it is not all bad news. As the FOMC works to control inflation, there are still ways to save money at the gas pump and when financing your vehicle.

Stay up to date on current Federal Reserve news, compare available loan rates and understand how future changes can impact you and your budget. Ultimately, patience is the best option — if you can hold out.