Bad Credit Borrowers Need to be Aware of Interest Rate Hike

The Federal Reserve (the Fed) just raised its main interest rate for the first time in 2016 last week. While the rate hike was modest, consumers still need to be aware of the effect it may have in the near future.

Fed Interest Rate Hike

Bad Credit Borrowers

The Fed is the country’s central banking system. Its key interest rate is what it charges banks to borrow money. This is the rate that just increased by 0.25% on December 14th, putting it in a range of 0.50 to 0.75%.

If that doesn’t seem like a lot, that’s because it’s not. Interest rates are still very low despite two hikes over the past two years. The Fed cited their confidence in an improving and stable economy as a reason for the rate increase. The committee is also forecasting three more hikes in 2017.

While the latest hike was modest, it will soon have an effect on the economy as it gradually pushes up rates for all credit products, like auto loans.

Auto Loans and the Interest Rate Hike

Credit cards and home equity lines of credit will soon see the effect of the increase. But for mortgages and auto loans, the interest rate hike’s impact is harder to pin down. This is because its impact on these credit products is indirect and unpredictable.

You may see the quarter point increase result in a similar rise in interest rates on auto loans. But even so, a modest hike will only lead to a very small monthly payment increase.

However, it is also possible that most captive finance companies will cover any higher rates in order to continue offering great financing deals. Auto sales are currently slowing down, so many lenders may be willing to eat any rate hike in order to attract consumers with low financing offers.

Such a rate hike is basically a non-issue for most consumers. However, there is the possibility that bad credit buyers will feel it the most. Credit-challenged buyers tend to be more impacted by monthly payment increases. Also, since the rates may rise across all credit products, it could leave subprime borrowers stretched thin due to the increased cost of financing.

Need a Car? You Might Want to Act Fast

If you have bad credit and are thinking of getting an auto loan, there’s no time like the present.

As we mentioned earlier, it’s possible that the Fed might raise rates three times in 2017. If you know you need a car, you might want to lock in a fixed rate on a car loan before another increase. It also appears that most lenders are tightening up their borrowing criteria. This is sort of a double whammy for bad credit consumers, as rates are on the rise at the same time lender standards are tightening.

According to TransUnion data, auto loans with payments that are 60 days or more past due are up over the past five years. At the end of 2017, auto loan delinquency rates are projected to be the highest they’ve been since the height of the recession. Data like this will soon cause lenders to “tighten up” their policies and be more careful with the loans they approve.

Basically, it might be in your best interests to get the car you need now, before rates rise again and lenders get stricter. And if you have bad credit and can’t seem to get approved, Auto Credit Express is here to help.

We can connect you with a dealership in your area that specializes in dealing with bad credit. Our service is free and it puts you under no obligation, so you have nothing to lose. Get started today by filling out our free and easy online application.

Posted on December 24, 2016 by in Bad Credit
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