You’ve probably heard that the Federal Reserve is raising interest rates, but what does that mean for car buyers? Analysts predict that the average rates on car loans will slowly increase, though it’s a bit more complicated than saying that they will follow every move of the Federal Reserve.
Bankrate Chief Financial Analyst Greg McBride expects average rates for new cars to rise to 4.5 percent during 2017, with rates for the best borrowers hovering in the low 3 percent range.
The Federal Reserve does not directly set the interest rates that consumers pay to borrow money, but their policies typically trickle down to consumers. The Fed's Open Market Committee works to manage inflation across the American economy, and federal fund interest rates are their primary tool in the battle against inflation.
The fed funds rate that is used by news outlets as the benchmark is just one component of auto loan rates, though it’s important enough that it can increase buyers’ monthly payments. It represents how much banks pay to borrow the money that they lend to you.
The rates that are charged to consumers not only reflect the bank’s cost of borrowing, they include adjustments for market conditions, the buyer's credit risk, risk incurred by the length of the loan, some profit for the lender, and other factors.
“Interest rates are most likely to keep going up this and next year with the Federal Funds Rate probably being roughly in between 1 to 1.5% by end of this year; this will also affect consumer and auto loan interests with an upward trend,” say TrueCar Chief Economist Oliver Strauss. “As the U.S. economic fundamentals remain very solid, the Fed’s quest of tightening monetary policy continues to potentially curb adverse price inflation trends.”
How Will Market Conditions Affect Auto Loan Rates?
Car loan prices reflect supply and demand. If a financial institution charges too much, they won’t get any loan customers, so they will have to lower rates or have a special promotion. If a lender has a sale on loan rates, other banks and credit unions in the market will be forced to lower their rates to compete. Before you default to the bank that you have always done business with, you’ll want to survey the market for a better deal. Be sure to include online banks and local credit unions in your search, as they are often able to meet or beat the deals offered by large institutions.
During the auto industry’s doldrums, it was pretty easy to find zero-percent financing deals from manufacturers. Currently, those deals are getting harder to find, with availability limited to outgoing models and cars that aren't moving off the lots as fast as manufacturers would like them to. If you're looking for the hottest new car on the market, you simply won't find a zero-percent deal available.
However, analysts are predicting a leveling-off or slow decline in auto sales in the next year. When that happens, buyers can expect incentive spending to come barreling back, as manufacturers work to protect their hard-won market share. Of course, the new car loan deals will still be found on slow-selling vehicles and those cars, trucks, and SUVs that have redesigned versions coming in the next model year.
How Can You Get the Best Auto Loan Rate?
While consumers can’t control the federal funds rate, there are a number of things that they can control to ensure that they are getting the best deal that they can.
The best new car interest rates are charged to consumers with top-tier credit ratings, so you can get a better financing deal if you work to improve your credit score and verify that there are no errors on your credit reports that are dragging down your score. By waiting a few months and putting in the work to improve your credit, you can save some dollars every month in finance charges.
Auto loan delinquencies are rising slightly, leading lenders to tighten their standards. This makes cleaning up your credit critical if you want to have a chance at the least expensive loan rates. You might also find that the process to apply for the loan is no longer as simple as going to an ATM.
Although it might seem like a great deal, extending the length of the loan to lower your payment will almost always cost you more in the long run. To offset the risk involved with longer term loans, most lenders will charge higher interest rates. In other words, you'll pay more to borrow the same loan amount, and you pay for a longer time. Keep the loan to the shortest number of months as you can afford to, and you'll pay a lower rate and less total interest. You’ll need to use an auto loan calculator to find the how big the monthly payment will be.
To increase your chances of getting the best rate, you should apply for a loan and get pre-approved before you get near a dealership. The last thing buyers should do is go into a dealer without an approved financing deal in hand. If the dealer doesn’t have something to compete with, you’re likely to be offered an auto loan that makes the most profit for them, not the best terms for you.
Think About the Big Picture
While market factors tend to dampen the speed of rising interest rates for car loans, the same is not true for variable-rate mortgage loans and credit card debt. Both will rise in lockstep with the increases in the fed funds rate, and you’ll want to figure those increases into your monthly family budget when you’re determining how much you have to spend on a new car.
While a quarter-point interest rate increase on a car loan might only add $10 or $20 to your monthly payments, the same increase in the early years of a $150,000 mortgage would be more dramatic. Before your car-buying odyssey begins, you might think about refinancing your variable-rate credit card debt to more affordable offerings that limit your exposure to rising rates.
The Bottom Line
Yes, car loan interest rates are going to go up, but the rise will be gradual. Buyers shouldn't panic and jump into a bad deal just to beat any rate increases, because getting a great price will likely save you more in the long run. Our Best Price Program saves buyers an average of $3,279 off MSRP by partnering with local dealers to provide guaranteed savings.
Car buyers can help determine the rates that they have to pay by shopping around for financing, seeking financing deals, keeping the lengths of their loans as short as possible, and improving their credit score.