It has been all over the news, interest rates are going up. But what does that mean for car shoppers? Do you need to look at less expensive cars, or run out and buy one today to avoid the rise?
Truth is, there’s no need to panic. Though it appears that rates are on an upward trajectory for 2017, the rise is expected to be both modest and gradual.
“Interest Rates are headed higher, and auto loan rates are no exception,” says Greg McBride, chief financial analyst at Bankrate. “But there is a silver lining,” he adds, “there is very intense competition in the auto loan market, and that is good for buyers.”
That competition and lack of action by the Federal Reserve has kept rates low through 2016.
The Federal Funds rate is a benchmark short-term interest rate set by the Federal Reserve. However, it plunged, along with the rest of the economy in 2007 and 2008, as the Fed used lower interest rates as a tool to keep the economy moving. It stayed near zero until the Fed bumped it up by a quarter of one percent in December 2015. The rate is not directly tied to consumer interest rates, but it’s a good indicator of where they are heading.
They recently gave it another quarter-point bump and have indicated that three more quarter point bumps are forecast in 2017. But if the economy slows dramatically they’ll likely back off on that prediction, and if it starts booming they can raise the rates more quickly.
Will auto loans match that .75 percent rise? The consensus among economists is probably not, due to the competitive pressures in the market, but they probably will rise somewhat. However, many believe that the automotive market may slow in 2017, which can lead to manufacturers introducing aggressive lease deals and finance incentives to keep sales strong.
If you currently have a car loan, you most likely won’t see any change in your payment, because most auto loans are fixed rate. If, however, you’re trying to pay down a ton of credit card debt, your family budget may be squeezed a bit because most credit card debt is variable rate. Likewise, most mortgages written in the last several years are at a fixed rate, but if yours is variable-rate you should figure rising mortgage payments into your monthly budget.
A modest increase in auto loan interest rates won’t make a big difference to most buyers. Say you want our top-ranked compact SUV, the Honda CR-V, and you’ll finance $25,000 of its price. You find a lender that offers you a five-year loan at 3.5 percent, and your payments will be $454.79 per month. If you have to wait a few months, and that rate rises to 4 percent, your payments will only be about six bucks higher per month ($460.41). Even if the rate jumps a full point to 4.5 percent, your payments would only be $466.08 per month (about $12 higher).
Over the term of the loan you’ll pay a total of $2,287.62 in interest with the 3.5 percent loan and $2,624.78 with the 4 percent financing.
The best rates will still be in the low 3 percent range, according to the experts at Bankrate. Used car rates typically run about half a percent higher than new car rates, and McBride doesn’t see anything on the horizon that would change that tendency.
If you’re trying to get a low monthly payment by stretching your payments out past 72 months (which isn’t a good idea) you may find that longer-term interest rates climb more quickly than shorter-term loan rates. As financial institutions try to mitigate something called “interest rate risk” in a rising rate environment, the difference between the rates on shorter and longer term financing will likely increase.
For example, today you can get a 5 percent loan for six years and 6 percent for seven (1 percent higher), as rates rise it might be a 6 percent loan for six years and a 7.5 percent loan for seven years (1.5 percent higher).
Bottom line, says McBride, is “Don’t lose any sleep over rising interest rates.”
So How Can You Make Sure You Get the Best Rates?
In order to ensure that you get the best rate possible, you should get your credit in tip-top shape before you get in your car-buying mode. Check your credit reports for any errors, and get them corrected. The last place you want to find out about a credit report error is in the finance office of a car dealership.
Always get pre-approved for financing before you visit the dealership, and make multiple banks and credit unions compete for your business. The dealership may beat the financing deal that you have in hand, but if you don’t have one, they’ll have no incentive to find you a better deal on a new car loan.
You’ll also want to check out U.S. News & World Report’s new car financing deals, where our expert researchers and journalist comb the market to find hundreds of the best deals each month. If you’re considering a certified pre-owned vehicle, we also provide a list of the best used car deals.