Key Takeaways
While the Fed doesn't directly set interest rates on auto loans, it does affect lenders' borrowing costs. When the Fed raises interest rates (it has done so 11 times since March 2022), lenders quickly follow suit. Higher interest rates have offset the tangible gains of stabilizing auto prices.
Inflation and its effects aren't likely to go away anytime soon, which means high interest rates on auto loans are likely to stick around for a while. The Federal Open Market Committee has been keeping the federal funds rate at record highs to combat high inflation, which tends to raise interest rates on consumer loan products.
So, are auto interest rates high right now? Unfortunately, the answer is yes. If you're planning on buying a car anytime soon, it's important to understand these factors and prepare for them.
Why are auto interest rates so high?
The Federal Reserve's choice affects the base interest rate, which has a domino effect on the cost of an auto loan. While a driver's interest rate is determined by several factors, including a borrower's credit history, the length of the contract, and the type of car, rising inflation means that drivers' interest rates will rise, even if they have perfect credit.
“One of the Fed's core missions is to suppress purchasing power, and they do that by raising interest rates,” explains Sarah Foster, senior U.S. economics reporter at Bankrate.
To achieve this goal, the Fed has raised interest rates 11 times since March 2022. And lenders are heeding the message, Foster says: “Interest rates on auto loans haven't been this high since 2008.”
As of June 2024, the Federal Open Market Committee has refrained from raising interest rates at its seven previous meetings, leaving the benchmark interest rate at 5.25% to 5.5%.
However, most observers believe the FOMC is done raising interest rates for now.
Rising interest rates make borrowing more expensive, Foster said, and that, combined with high costs, is a one-two punch to Americans' finances.
She explains that this has forced many drivers “to give up on very large purchases at uncomfortably high interest rates.”
Higher interest rates are just one example of the Fed's goal of tame inflation. “Higher borrowing costs not only discourage spending, but also put a strain on people who can't afford big-ticket items, slowing the economy,” Foster said.
Foster said that even if the Fed abandons raising interest rates, Fed Chairman Jerome Powell has warned that high interest rates are not likely to go away anytime soon.
With this in mind, motorists should prepare for rising interest rates as the Fed continues to keep high inflation in check.
The increases above are due to rising base interest rates and rising vehicle prices. Stay up to date on the changing news and how it could affect your finances with Bankrate's Federal Reserve System hub.
How to save when interest rates are high
While the interest rate you receive depends on many factors, including ones you can't control, like inflation, you can take actions to save money regardless of whether the Fed raises interest rates.
Look around
Most lenders have higher interest rates right now, but that doesn't eliminate the benefit of comparison shopping. Compare the rates and terms of at least three lenders to determine which quote best suits your needs. Pay close attention to the APRs and repayment terms available.
Calculate your true cost of ownership
With car prices reaching record highs, it's important to focus on your budget when you're shopping. With so little room to spare, it's best to calculate how much you can actually afford before you go to the dealership so you know how much you'll need to borrow to get behind the wheel of your new car.
Bankrate Tips
Consider the total loan amount, not just the monthly payment. While it may be tempting to take out a long-term loan to get lower monthly costs, this could end up costing you more in the long run.
Consider an electric vehicle
While EVs tend to have higher upfront costs, there are benefits beyond the gas pump: You can apply for a green auto loan and receive an EV tax credit, which can help recoup losses from rising interest rates.
Finalize expected funding
One of the surest ways to ensure you get a loan on good terms is to apply for a loan pre-approval, so you know exactly what interest rate you can expect. Not all lenders offer this step, so when you're comparing, make sure you check if they have it.
Buying a used car
Unfortunately, new and used cars tend to cost more than usual, but used cars tend to cost slightly less. If you're flexible about the type of car you want, buying a used car can save you money on monthly expenses.
How to refinance when interest rates fall
One of the best times to consider refinancing your auto loan is when interest rates have dropped and your credit score has improved, and the process is similar to applying for an initial loan.
Evaluate your current loan: Before you begin the refinance process, it’s important to review the term and interest rate of your current loan. Once you have these figures in mind, use our car refinance calculator to figure out how much you’ll save each month. Check your credit: Understanding your credit score can help you determine if you qualify for a good interest rate. When it comes to refinancing, just like any other loan, the better your credit, the more competitive your interest rate will be. Compare: Comparing at least three different lenders is key to getting good terms. Starting with the bank or lender you originally signed with is a good starting point. There may be discounts available for current customers. However, not all lenders allow you to refinance your existing loan. Receive new terms: After submitting the necessary documents and possibly paying a prepayment penalty, you will receive your new terms. Make sure you’ve made your payments to your previous lender before you finish this process.
Now may not be the best time to buy
Many people can't afford to wait to buy a car, but patience may be your ally when it comes to saving money. Interest rates will continue to make it more expensive to borrow money to buy a car, so whether you're willing to wait out high interest rates or go to a dealership, prepare for it to cost more to get a car loan.