Yahoo Autos When Can Consumers Expect Car Loan Interest Rates to Drop?
For the first time in over four years, the Federal Reserve has cut interest rates, offering hope to car buyers burdened by high borrowing costs. While the stock market saw immediate gains from the announcement, experts warn that car loan rates might not improve immediately, as these rates depend on more than just Fed’s decisions.
According to Jonathan Smoke, chief economist for Kelley Blue Book, auto loan rates may take “several weeks or even months” to respond to the Fed cut. “The Fed does not directly control the rates consumers see, and auto loan rates may end up being the slowest to move,” Smoke said.
Why auto loan rates aren’t dropping quickly
The Federal Reserve sets the interest rate that banks use when they lend money to each other, which trickles down into the rates for consumer loans, including auto loans. But just because the Fed has slashed its rate doesn’t mean lenders will immediately follow suit.
“The Federal Reserve does not directly control interest rates on auto loans, rather these are set by buyers and sellers in the bond market,” said Howard Pressman, a financial advisor based in Vienna, VA. “Car loans typically follow five-year Treasury rates which have not moved much since the Fed lowered short-term interest rates.”
Some experts point out that car loan rates have already dropped marginally from earlier this year in anticipation of rate cuts. “Since May, I would say we have seen short term rates come down a little over 100 basis points. That is almost $20 a month in savings on a monthly car payment,” said Michael Douglas, head of dealer services at Chase Auto.
According to data from Edmunds, the average new car loan APR has decreased just 20 basis points from May to August, to 7.1%.
Should consumers wait for bigger auto loan rate cuts?
Even as rates inch lower, many consumers wonder if it’s worth holding out for better car loan terms. According to Greg McBride, chief financial analyst at Bankrate, lenders are cautious and still passing on increased costs to consumers. “Higher interest rates do make it more expensive to borrow, and that is a braking mechanism on the economy as car buyers,” said McBride.
The Fed is expected to continue cutting rates later this year. But, even with the cuts, the overall interest rate remains far above pre-pandemic levels, making it difficult for car loan interest rates to come down significantly in the immediate future.
“The five-year Treasury was 4.7% back in April, and now it’s down to 3.5% as of September 27th, so we might have seen most of the movement for now,” said Joseph Stemmle, a financial advisor in Richmond, VA.
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Key factors affecting car loan costs
While car loan interest rates remain relatively high, experts point to other factors that are significantly impacting the cost of buying a car right now, including dealer inventory, consumer credit scores, and longer auto loans.
Consumers with poor credit face 200% higher auto loan interest rates
Your credit score has a big influence on the interest rates you’ll see when obtaining an auto loan.
Consumers with credit scores between 300 to 500 saw an average new car auto loan interest rate of 15.77% in the second quarter of 2024. That’s over 200% more than the average interest rate of 5.25% offered to consumers with credit scores between 781 to 850, according to data from Bankrate.
More consumers are taking out longer car loans
Consumers looking to get a new set of wheels are increasingly taking out longer loans to make the monthly payments more affordable. But, Stemmle warned that such arrangements come with long-term costs.
“We have seen people making decisions to move from the more traditional five-year loan to six and even seven years to make the monthly payments more affordable,” Stemmle said. “The longer you borrow, the higher interest rate and the more interest you are paying over the life of the loan. That is because it is a higher risk to the lender.”
Some automakers offering deals due to surplus inventory
While many prospective buyers may want to wait for interest rates to decline, certain brands are likely to offer enticing incentives to buyers to try and offload their ballooning inventories.
Nationally, automotive manufacturers have an average supply of 77 days of new cars in their inventory, according to Kelley Blue Book. But some brands, like Alfa Romeo, Lincoln, Jaguar, Mini and Ram, have over twice that. The surplus is a bonus for buyers already interested in buying a new car from one of those brands, as dealers are more likely to offer hefty discounts to make the sale. But, if you’re looking at low-inventory brands like Toyota and Honda, you’re unlikely to find much room on the sticker price.
Related: Tesla’s EV boom overshadowed by alarming production bottlenecks
Should you buy a car now or wait for better financing options?
Whether or not to buy a car now depends on your situation. If you have a reliable vehicle and can afford to wait, holding off a few months could save you money on financing.
But for those who need a car immediately, there are ways to find a good deal despite higher rates.
How to get the best auto loan deal in a high-rate environment
For buyers who can't wait for rates to drop, there are strategies to secure the best deal:
Shop around: Rates can vary between lenders, so compare offers from banks, credit unions, and online lenders.
Check your credit score: Borrowers with higher credit scores get better rates, so improve your credit if possible before applying.
Consider a co-signer: If you have poor credit, a co-signer with better credit can help secure a lower rate.
Consider high-inventory brands: dealers are more likely to make deals on cars they need off their lots.
Final thoughts
While the Federal Reserve’s rate cut is a positive sign, auto loan rates may not drop significantly until later in 2024 or early 2025. For now, car buyers will need to navigate high rates carefully. If you can wait, holding off on a car purchase could save you money. But if you need a vehicle now, explore all your options to ensure you get the best possible deal.
