Rising interest rates have affected nearly every aspect of the economy, from grocery prices to loan costs. While the Federal Reserve paused increasing the federal funds rate at its June meeting, rates have climbed a total of 11 times during this economic cycle.
As the summer car-buying season approaches, it’s essential to understand how these higher rates might influence the price of securing a new vehicle. Should you wait for rates to drop, or is this the new normal for car buyers? And if you decide to wait, how long will it be?
To delve into these questions, we consulted with Bankrate Chief Financial Analyst Greg McBride.
Rates likely won’t decrease this year
To put it simply, rates aren’t expected to decrease this year. This is largely due to the Federal Reserve’s ongoing efforts to curb inflation. However, higher interest rates aren’t the only factor making car loans more expensive in 2024.
“Higher interest rates do make it more expensive to borrow, and that acts as a braking mechanism on the economy for car buyers,” explains McBride. “Rising interest rates are another factor making it costlier to purchase and finance a vehicle.”
McBride is referring to the higher vehicle prices that have coincided with the surge in interest rates. According to Kelley Blue Book, average vehicle prices rose slightly in October, with the average new vehicle costing over $48,200. A more expensive car means higher financing costs for borrowers.
As shown below, interest rates for both new and used vehicles have steadily increased since the pandemic began in 2020.
So, is now a good time to finance a car?
The decision ultimately depends on your needs. If your current vehicle is reliable and meets your transportation needs, it might be wise to keep it for now. However, if you need a new vehicle, be prepared to spend more on financing, particularly if you have poor credit.
Competitive rates for poor credit borrowers will be hard to find
Moves made by the Federal Reserve don’t directly set the interest rates you receive when buying a car. Instead, they affect the cost for lenders to provide financing, which gets passed on to borrowers, leading to tighter lending criteria. With the federal funds rate having increased 11 times since early 2022, this domino effect significantly impacts borrowers.
Those with poor credit are most disproportionately affected, explains McBride.
“Not only will they continue to see much higher rates, but their ability to borrow and the amount they get approved for could also change as the year progresses,” he says.
According to Experian’s third quarter of 2023 data, borrowers in the deep subprime category (credit scores between 300 and 500) can expect rates over 14 percent for new cars and over 21 percent for used cars. Unlike those with strong credit, borrowers with bad credit lack the leverage to secure the best available rates.
High prices hit wallets harder than interest rates
Though rising interest rates have been driven by the Federal Open Market Committee’s decisions, they aren’t the only factor impacting consumers.
“The real issue,” McBride says, “is vehicle prices. The impact of higher interest rates is relatively minor compared to that.”
Vehicle prices surged during the pandemic and have remained high. Even as prices stabilize, high interest rates diminish any potential savings.
Jonathan Smoke, in his recent Cox Automotive report, explained, “The good news for consumers is that auto loan rates may not worsen despite the threat of another Fed rate increase.”
“Auto loan rates are more tied to bond yields and yield spreads than the Fed Funds Rate,” he noted.
Fortunately, Smoke believes these factors have peaked due to credit tightening during the banking crisis.
Additionally, wholesale vehicle prices decreased in the spring, which could lead to lower prices for used car shoppers this summer. More cars on the lot will reduce competition for finding your ideal car.
How to still get the best auto loan deal
You may need to buy a car even when the economy is challenging. If so, consider the following tips to secure a good deal:
- Shop Around: While many lenders offer similar rates, it’s still important to compare and find the best rate you can. Pay attention to additional fees that lenders may impose to save extra money.
- Find the True Cost of Ownership: Vehicle ownership costs extend beyond the monthly car payment. Calculate the all-in cost, including fuel, maintenance, and other expenses.
- Lock in the Expected Rate: Apply for loan preapproval if your lender offers it. This will tell you exactly what your monthly payments will be.
- Consider Driving an EV: Beyond the environmental benefits, electric vehicles can be more cost-effective over time. EV incentives can also provide financial benefits.
Lastly, ensure your credit is in excellent shape. A higher credit score will facilitate easier loan approval and access to better interest rates, advises McBride.
In Conclusion
While it’s impossible to predict the future, experts believe interest rates probably won’t decrease soon. Given this, use the time to improve your credit score. By doing so, you’ll be in a position to secure the most competitive rates available, regardless of market conditions.