How Inflation Affects Auto Loan Rates

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Unfortunately, inflation and its impacts are unlikely to go away any time soon. According to Bankrate’s Third Quarter Economic Indicators Survey, 43% of economists agreed that inflation would be higher over the next 12 to 18 months. Given that it is likely that inflation has not yet peaked, this is an important time to prepare for its impacts, one being higher interest rates.

How the Fed Affects Auto Lending Rates

The Federal Reserve does not directly influence auto loan rates, but it does affect the cost for lenders to borrow money. A Fed rate hike usually means lenders follow quickly.

How Inflation Affects Interest Rates

The Federal Reserve’s choices affect the reference rate which has a domino effect on the cost of financing vehicles. Although a driver’s rates depend on several factors – including the borrower’s credit history, length of term, type of vehicle and more – increased inflation means higher interest rates for drivers. drivers, even with perfect credit.

“One of the Fed’s main jobs is to control purchasing power, and it does this by raising interest rates,” says Sarah Foster, senior US economics reporter at Bankrate. To achieve this goal, the Fed raised rates again in November, setting the benchmark rate at 3.75-4%. The increase responds to an already tight auto market as supply chain issues keep vehicle prices high, averaging more than $48,300 in August according to Kelley Blue Book.

These rising interest rates make borrowing more expensive, says Foster. This makes the cost of financing vehicles considerably higher than in previous years. Since the start of 2022, average vehicle interest rates have been rising: 1.77 percentage points for a 60-month new car loan and 1.78 percentage points for a 48-month used loan, according to a national Bankrate rate survey.

Raising interest rates is just one result of the Fed’s goal of controlling inflation. “Higher borrowing costs not only discourage spending, but prevent people from affording big-ticket items, which slows the economy, Foster said.

“The hope is that eventually these higher rates will crush demand so much that inflation will eventually fall,” Foster said. But that wish doesn’t come with risks, “A consumer-starved economy often means a recession, which is no fun for anyone.”

With all of this in mind, drivers will face higher rates as the Fed continues to control high inflation. Now is the time to prepare for increased costs.

Rate of 08/10/2022 for a new car loan 60 months 4.94%
Rate of 12/10/2022 for a new car loan 60 months 5.56%

As noted above, rates have jumped significantly since August, in line with Fed meetings. This increase can be attributed to the higher referral rate as well as more expensive vehicles. Stay up to date with evolving news and how it affects your finances on Bankrate’s Federal Reserve hub.

How to get a deal when interest rates are high

Although the interest rate you receive depends on many factors, including uncontrollable factors like inflation, there are always steps you can take to save money regardless of any rate hikes by the Fed.

Compare the prices

Most lenders will have higher rates right now, but that doesn’t negate the benefit of shopping around. Compare the rates and terms of at least three lenders to decide which quote is best suited to your needs. Pay particular attention to the APR available as well as the repayment tenure.

Calculate the true cost of ownership

As vehicle prices reach record highs, it’s essential to focus on your budget when shopping. Without much wiggle room, it’s best to calculate how much you can really afford before heading to the dealership. This way you will understand how much you need to borrow to drive your new car.

Discount rate advice

Be sure to shop around for the full loan amount, not just the monthly payment. While it may be tempting to take out a loan with a longer term and lower monthly costs, it may be more expensive in the long run.

Consider an electric car

The initial cost of an electric vehicle tends to be higher, but it comes with additional benefits aside from the gas pump. By applying for a green car loan and receiving electric vehicle tax credits, you can recoup any money that may be lost due to higher interest rates.

Lock in planned funding

One of the surest ways to get a good deal is to get a loan pre-approval which will give you a clear idea of ​​what your expected rates will be. Not all lenders offer this step, so be aware of it when shopping around.

Buy a used car

Unfortunately, both new and used vehicles have higher than usual rates right now, but used vehicles are slightly lower. If you have some flexibility in the type of vehicle you want, buying a used car can save you money on your monthly cost.

How to Refinance Once Rates Drop

One of the most effective times to consider refinancing your car loan is when rates have dropped and your credit score has improved. The process is quite similar to the steps taken when applying for your original loan.

  1. Evaluate the current loan. Before you begin your refinancing process, it is first important to review your current loan, both the terms and the exact interest rates. Use an auto refinance calculator to figure out the potential monthly savings once you have these numbers in mind.
  2. Check your credit. By understanding your credit score, you can determine where you land in terms of available lenders. When it comes to refinancing, as with any loan, the better your credit, the more competitive your rates will be.
  3. Find the value of the vehicle. Depending on the value of your vehicle, refinancing is not always the best financial solution. If you’ve almost paid off your vehicle, it’s not wise to refinance.
  4. Compare the prices. Comparing at least three different lenders is key to getting a good deal. A great place to start is with the bank or lender you originally signed up with – there may be discounts for current customers. Although not all lenders allow you to refinance an existing loan.
  5. Receive new conditions. After submitting the necessary documentation and, in some cases, paying a prepayment penalty, you will receive your new terms. Before closing the chapter on this process, be sure to repay your old lender.

Now may not be the best time to buy

Although many don’t have the luxury of waiting to buy a car, patience may be on your side when it comes to saving money right now. Interest rates, which will likely rise even further after the next Fed meeting, combined with high vehicle costs, are now making it difficult to buy. Instead, consider waiting until rates cool.

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