How Does the Fed’s Interest-Rate Hike Affect Car Loans?

You may have heard that the Federal Open Market Committee (Fed) has recently hiked interest rates — but what does that mean exactly, and are car interest rates going up in response? It’s a complicated question, as there are many complexities regarding auto loan interest rates. However, we’re here to help you understand what you should know about car loan interest rates. 

Here’s an overview of why the interest rates are happening and the ways that they’ll affect car loans and purchases.

Are Car Interest Rates Going Up? Let’s Review the Fed.

Before you learn what’s a good interest rate for a car, it’s important you understand the Fed influences interest rates. The Fed Board meets eight times each year to overview the country’s financial conditions and discuss if they should adjust the rate at which banks charge loans. This is just one of the methods that the Feds use to control the flow of money in the United States — whether to encourage economic growth with lower interest rates or control inflation with higher rates.

To curb the inflation caused by the pandemic and other factors, the Board of Governors at the Federal Reserve System has announced their plan to raise the benchmark interest rate higher — an increase of a magnitude they haven’t done since the 90s. By increasing the interest rates, they intend to control the economy and ease inflation. As a result, credit should tighten.

How Rate Changes Affect Auto Loans

So, are car interest rates going up? Yes — but not directly. The federal fund rates act as the groundwork for the US prime rate, which tells lenders how much they should charge consumers when taking out personal loans. Therefore, the federal fund rate doesn’t control the rates of auto loans directly, but they are heavily influenced by it. Therefore, car interest rates are going up this year, albeit steadily.

Buying New Cars

Although the federal interest rate won’t affect the final purchase price of new cars, they’ve still increased considerably since early 2021 — the Ukraine war, international microchip shortages, and other causes are preventing manufacturers from meeting car demands. However, car interest rates are going up for new cars and increasing the cost of their monthly payments. In particular, every increase in auto loan rates adds around 3% to the monthly payment.

Purchasing Used Cars

The high prices and increased rates for new cars are driving buyers to purchase used vehicles instead. While the prices for used cars were already declining prior to the Fed’s announcement, dealers have fewer high-mileage older cars available because not many were made during the 2008 financial crisis. Despite this, used car prices have still fallen in recent months.

If you’re looking for a car dealership that works with low-income budgets, you’ve come to the right place. PA Auto Credit will help you upgrade car loans and discover what's a good interest rate for a car in your budget. To get started, reach out today to learn more about our services and schedule an appointment. 1-800-736-4450