When it comes to the economy, the Federal Reserve doesn't wave a magic wand that automatically makes prices go up and down. When changes happen, they're gradual, and start a ripple effect that takes time to reach people at the consumer level.
While ultimately things like loans may get more affordable than the current average, it could take weeks or months to see those changes. And by then, we may be nearing another Fed rate cut. We've already had two cuts, and a third is likely in December 2024.
Here's how Federal Reserve interest rate cuts impact auto loans, and what that means for you.
Updated November 14, 2024
Why Did The Fed Lower Rates?
The Federal Reserve recently began to lower rates to tame inflation and help keep the labor market strong.
In a statement, the Federal Reserve said "The Committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance." To that end, they began lowering rates with a half-percentage point cut on September 18, 2024. This is the first rate cut since March 2020, when rates were slashed in response to the pandemic.
In a news conference following the first FOMC meeting which cuts rates, Federal Reserve Chairman Jerome Powell said "We're trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation. That's what we're trying to do, and I think you could take today's action as a sign of our strong commitment to achieve that goal."
On November 7, the Fed cut rates a second time, landing the benchmark rate at 4.5% to 4.75%, which is down 0.25%.
It's predicted that the Fed will make another rate cut at their meetings in December. Rates will be cut by the same 0.25% again. Powell didn't commit to how high the rate cuts would be heading into 2025.
“The path after [the December cuts] is a little less certain, but I think a full point across 2025 is still possible,” Cox Economist Jonathan Smoke wrote in an email shared with Automotive News, saying "new-vehicle auto loan interest rates at the start of November are down 0.3 points from a year earlier while used-vehicle loans are down 0.55 points."
Are Interest Rates Going Down In 2024?
When the Fed raises and lowers its rate, it's setting the short-term overnight lending rate for banks. But this trickles down into consumer products like auto loans, mortgages, and credit card rates, which will all begin to come down.
In fact, according to CBS News, some credit cards and banks have already begun to lower rates on their cards, but it's not likely to save you more than a few dollars a month at this point.
The half-point cut in benchmark rates could send some people back into the auto market, but, according to Automotive News, may not be "enough to unleash the demand dealerships want to see."
Credit industry professionals predict it could take until late 2024 or even into 2025 until interest rates and vehicle prices come down enough to drive demand. For roughly a decade before 2022, auto loan interest rates for new cars held steady between 4% and 5.5%, so now, with average rates nearly double, consumers are looking for relief.
Current interest rates on auto loans are between 5.25% and 21.55% depending on your credit situation and the type of vehicle you're buying (new or used). The average new car loan had an interest rate between 7.1% and 11.3% in August 2024 and was even higher in September.
If the Fed continues to drop interest rates, as predicted, we could see rates on auto loans beginning to fall by Christmas this year. However, it likely won't come back down to the level we saw in the early part of this century. In fact, according to Cox Automotive, we're eventually going to see rates fall to an average of 7.5% to 8% for new vehicles and around 10% to 10.5% for used vehicles.
However, where the interest rates land in the next year remains to be seen.
Getting The Best Rate Possible On A Car Loan
Getting a low interest rate these days often takes the right combination of vehicle choice, good credit score, and incentives. So to qualify for the lowest rate you can it helps to know what to look for.
Find The Right Lender
Start by getting the right lender for your credit situation. If you know you have a poor credit score and aren't sure about your ability to qualify for financing, start by seeking a loan with institutions known for financing bad credit, such as credit unions, and special finance dealerships. You can rate shop for the best loan by applying with several lenders in a two-week period.
This is known as the rate shopping window and is a valuable tool when you need a car loan. When you group your loan search in a short time frame, the credit bureaus know you're serious about getting a specific type of loan, and so there is less damage to your credit than if you spread out the search over months.
Choose The Right Car
Once you've found a lender, it's time to consider the vehicle you're financing. The best rates are typically found on new vehicles. Of those, models that are seeing the end of their run tend to have the best rates, for example, looking for a remaining 2024 model over a 2025 model may get you lower interest rates. New cars almost always have a lower interest rate than used cars, and they cost less to insure, as well.
If you're getting a loan through a special finance dealership, you first get a loan approval, and then the dealer will let you know which vehicles on the lot fall into your range. It may surprise you that a bad credit borrower may be able to finance a new car before an older used one.
Shop For Incentives
Be aware of what incentives are being offered and if you qualify. A number of incentives are offered by different manufacturers, and you may or may not qualify for them with poor credit. You can ask your dealer about any cash incentives, or manufacturer discounts while you're shopping. With bad credit, you're more likely to qualify for cashback discounts rather than low-interest rate incentives.
