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4 min read Published March 22, 2023
Writen by Rebecca Betterton Written by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers to navigate the details of borrowing money to purchase the car they want.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers gain the confidence to manage their finances by providing precise, well-studied information that breaks down complicated subjects into bite-sized pieces.
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However, inflation and its repercussions are not going away anytime soon. According to Bankrate’s Third-Quarter , 43 % of the economists believe that inflation will become more significant in the next 12 to 18 months. As inflation has yet to hit its peak, now is crucial to plan for its impact including increased interest rates. What does the Fed affects auto loan rates
The Federal Reserve doesn’t directly influence auto loan rates however it affects the costs for lenders to borrow money. A rise in the Fed rate usually means lenders are quick to follow.
How is inflation affecting interest rates? Choices made by the Federal Reserve affect the which will have an impact to the costs of vehicle financing. While a driver’s rate is contingent on a variety of variables — such as a credit history of the borrower duration, length of the term, vehicle model and morean increase in inflation can mean higher rates of interest for motorists even with perfect credit. “One one of the Federal Reserve’s core obligations is to maintain purchasing power under control, and they do it through raising interest rates” Explains Sarah Foster, senior U.S. economic reporter for Bankrate. To achieve this goal, the Fed hiked rates yet in March, and set the benchmark rate at 4.75-5 percent. This is a step in the direction of a constrained car market, where supply chain issues are keeping vehicle prices high, averaging over $48,300 according to . These rising interest rates make it more expensive to lend money, explains Foster. Which makes it more expensive to finance for vehicles dramatically higher than previous years. Since the beginning of 2022 the average interest rate for vehicles have been on the rise: 1.77 percentage points for 60-month car loan or 1.78 percentage points for a 48-month used loan, according to the Bankrate survey on national rates. The higher interest rates are one outcome of the Feds policy to reduce inflation. “Higher borrowing costs don’t just hinder spending but also rob people out of being able pay for big-ticket items, causing economic growth to slow down,” Foster says. “The hope is that eventually, those higher rates will crush demand so much that inflation eventually drops,” Foster says. However, this isn’t a risk “An economy starved of consumption often means a recession, which isn’t fun for anybody.” With all of that in mind motorists will be met with more expensive rates as the Fed continues to control high inflation. This is the perfect time to prepare for raising costs. Data taken from Bankrate
8/10/2022 rate for a 30-month new car loan
4.94%
10/12/2022 rate for a 60-month new car loan
5.56%
As you can see the rates have increased significantly since August, in line with the Fed meetings. This increase can be attributed to the increased benchmark rate along with higher-priced vehicles. Keep abreast of new developments and the impact it has on your financial position on . What can you do to find a good deal when interest rates are high The interest rate you pay is contingent on many factors, including inexplicably high inflation rates but there are some adjustments that you can take in response to the decisions made through the Fed. Compare lenders Most will have higher rates right now however that shouldn’t detract from the advantages of looking around. and terms from at minimum three lenders to choose which offer is most suitable for your requirements. Pay close attention to the current APR as well as the term of repayment. Determine the true cost of ownership. As vehicle prices hit record highs it is vital to focus on your budget when you shop. There isn’t much room for error it is important to determine figure out how much you are able to manage before heading to the dealer. This will help you understand how much you need to borrow in order to purchase your new vehicle. Tip from the Bankrate
It is important to look over for the entire loan amount, not just the monthly payments. While it might be appealing to borrow a loan that has cheaper monthly costs, it can be more costly over the long term.
Think about an electric car price of the initial payment is typically more expensive, however they offer additional benefits beyond the fuel pump. When you apply for a loan and receiving it, you could earn the money back that could be lost due to the higher interest rates. Lock in expected financing One of the most reliable ways to get a good deal is to make an application for a loan which will give you a firm idea of what your expected costs will likely be. Not all lenders offer this step, so look out for it when you shop for a loan. If you are buying a second-hand car, unfortunately new and used vehicles are both priced higher than normal rates at the moment, however used vehicles are a bit lower. If you have any flexibility in the type of vehicle you’re looking for, it could lower your monthly cost. Refinancing your loan after rates fall One of the most efficient times to consider the possibility of refinancing your auto loan is when rates have dropped and your credit score has improved. This is a lot like the procedures you follow when you first applied for the loan. Evaluate current loan. Before starting your refinancing journey, it is essential to look at the current loan and the terms as well as the exact interest rates. Utilize this information to determine your savings potential each month when you have the numbers in mind. Examine your credit. By understanding your you can determine where you land in relation to the lenders you can choose from. When it comes to refinancing as with any loan — the better your credit, the more favorable the rates you will receive. Find vehicle value. Based on the value of your vehicle refinancing it might not be the most efficient financial decision. If you’ve almost paid off your vehicle but are not sure if it’s a good idea to refinance. Shop around. at least three different lenders is crucial to finding a bargain. The best place to start is the bank or lender that you initially agreed to with — there may be discounts for current customers. However, not all lenders will let you modify an existing loan. You will be offered new conditions. After you have submitted the required documentation and, in certain cases, paying a penalty for prepayment, you will receive your new terms. Prior to closing the chapter this process be sure that you pay off the prior lender. Now might not be the ideal time to purchase a car. even though many people don’t need to be waiting for a time to purchase a car and patience might be on your side in saving money right now. The likelihood of rising even higher after the next Fed meeting. In addition, the rising costs for vehicles make this an uneasy time to purchase. Consider holding off until rates cool down. Find out more
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Authored by Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the ins and outs of securely using loans to buy the car they want.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain confidence to control their finances by providing concise, well-studied information that breaks down otherwise complicated topics into bite-sized pieces.
Auto loans editor
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