Unfortunately, inflation and its impacts are likely not going away anytime soon. According to Bankrate’s Third-Quarter Economic Indicator poll, 43 percent of economists agreed that inflation will be more significant over the next 12 to 18 months. Given that it’s likely inflation has yet to peak, it is an important time to prepare for its impacts — one being higher interest rates.
How the Fed affects auto loan rates
The Federal Reserve doesn’t directly influence auto loan rates — but it does affect the cost for lenders to borrow money. An increase in the Fed rate usually means lenders are quick to follow.
How inflation is affecting interest rates
Choices by the Federal Reserve affect the benchmark rate which has a domino effect on the cost of vehicle financing. Although a driver’s rates depend on several factors — including a borrower’s credit history, term length, vehicle type and more — increased inflation means higher interest rates for drivers even with perfect credit.
“One of the Fed’s core duties is to keep purchasing power in check, and they do it by raising interest rates,” explains Sarah Foster, senior U.S. economy reporter at Bankrate. To achieve this goal, the Fed increased rates once again in November, setting the benchmark rate to 3.75-4 percent. This increase meets an already tight car market as supply chain issues keep vehicle prices high, averaging over $48,300 in August according to Kelley Blue Book.
These rising interest rates make it more expensive to borrow money, explains Foster. Which makes the cost of financing for vehicles dramatically higher than years prior. Since the start of 2022, average vehicle interest rates have been on the rise: 1.77 percentage points for a 60-month new car loan and 1.78 percentage points for a 48-month used loan, according to a national Bankrate survey of rates.
Higher interest rates are just one result of the Feds’ goal to quell inflation. “Higher borrowing costs don’t just disincentivize spending but squeeze people out of being able to afford big-ticket items, causing the economy to slow,” Foster says.
“The hope is that eventually, those higher rates will crush demand so much that inflation eventually drops,” Foster says. But this wish doesn’t come with risk, “An economy starved of consumption often means a recession, which isn’t fun for anybody.”
With all of this in mind, drivers will be met with higher rates as the Fed continues to control high inflation. Now is the time to prepare for raising costs.
|8/10/2022 rate for a 60-month new car loan||4.94%|
|10/12/2022 rate for a 60-month new car loan||5.56%|
As displayed above, rates have jumped significantly since August, in line with the Fed meetings. This increase can be attributed to the higher benchmark rate along with more expensive vehicles. Stay up to date with changing news and how it affects your finances on Bankrate’s Federal reserve hub.
How to get a deal when interest rates are high
While the interest rate you receive is dependent on many factors, including uncontrollable ones like inflation, there are still moves you can make to save money regardless of rate hikes made by the Fed.
Most lenders will have higher rates right now, but that doesn’t negate the benefit of shopping around. Compare rates and terms from at least three lenders in order to decide which quote is best for your needs. Pay close attention to the available APR along with the repayment term.
Calculate true ownership cost
As vehicle prices hit record highs it is vital to focus on your budget when shopping. Without much wiggle room, it is best to calculate how much you can truly afford before setting out to the dealership. This way you will understand how much you need to borrow in order to drive your new car.
Be sure to shop the total loan amount, not just the monthly payment. While it can be enticing to take out a longer-term loan and cheaper monthly costs, it can be more expensive in the long run.
Consider an electric car
The upfront cost of an EV tends to be higher, but they do carry added benefits outside of the gas pump. By applying for a green auto loan and receiving EV tax credits you can make back any money that may be lost due to higher interest rates.
Lock in expected financing
One of the most sure-fire ways to get a good deal is to apply for loan preapproval which will give you a firm idea of what your expected rates will be. Not all lenders offer this step, so look out for it when shopping around.
Buy a used car
Unfortunately, new and used vehicles both carry higher than usual rates right now, but used are slightly lower. If you have any flexibility in the type of vehicle you want, buying a used car can save you money on your monthly cost.
How to refinance once rates drop
One of the most effective times to consider refinancing your auto loan is when rates have lowered and your credit score has improved. The process is fairly similar to the steps taken when applying for your initial loan.
- Evaluate current loan. Before beginning your refinancing process it is first important to look at your current loan, both the terms and exact interest rates. Use an auto refinance calculator to understand potential monthly savings once you have those numbers in mind.
- Check your credit. By understanding your credit score you can determine where you land in terms of available lenders. When it comes to refinancing — just like with any loan — the better your credit, the more competitive your rates will be.
- Find vehicle value. Depending on the value of your vehicle, refinancing might not always be the best financial move. If you have almost paid off your vehicle, it is not wise to refinance.
- Shop around. Comparing at least three different lenders is the key to getting a good deal. A great starting point is the bank or lender that you initially signed off with — there may be discounts for current customers. Though not all lenders let you refinance an existing loan.
- Receive new terms. After submitting the necessary documentation and in some cases paying a prepayment penalty, you will receive your new terms. Before closing the chapter on this process be sure that you pay off your previous lender.
Now might not be the best time to buy
Although many do not have the luxury of waiting to buy a car, patience may be on your side when it comes to saving money right now. Interest rates, which likely will rise even more following the next Fed meeting combined with high vehicle costs make now a challenging time to buy. Instead, consider holding off until rates cool down.