Americans have had to deal with price increases at the supermarkets, gas pumps and dealers in the past year. As the Federal Reserve works to quell inflation caused by the pandemic, there will be some growing pains that will affect all facets of borrowing — including auto lending — as the Central Bank helps the economy return to normal.
The Fed meeting in May brought about a major change, pushing the federal fund rate to 0.75-1 percent. And this week’s meeting expressed a similar intent, all with a focus on controlling inflation by raising benchmark rates to 1.50-1.75.
How the Fed Affects Auto Loans
The Federal Open Market Committee (FOMC) sets the benchmark on which auto lenders base their rates.
How to save money regardless of the rate increase?
The key to saving money is preparedness. So while car prices remain high and borrowing costs are rising, there are still ways to get ahead and save money.
Apply for loan approval in advance
By applying for a car loan pre-approval, you can pin down your expected monthly costs before deregistering your vehicle. It gives you a good insight into the true cost of your new car and gives you a head start when it comes to negotiations. You can also use the pre-approved rate when comparing other loan options.
Consider a trade-in
Trading in your current vehicle is a great way to drive away with a new car while spending less money on a down payment. It also saves you the headache of selling your car privately.
It is recommended that you compare at least three different loan offers when looking for car financing. Don’t sign off on the first deal you come across, and understand the cost differentiation associated with dealer financing versus other lenders.
Only buy what you can afford
As with anything when it comes to major purchases, it’s important to do the math ahead of time to ensure you only sign off on a vehicle you can afford. This way, you can ensure that you can keep up with your monthly payments and be prepared for even the worst-case scenario.
While buying EVs usually carries a higher purchase price tag, they can be much cheaper over the lifetime of the property. Check out special tax credits offered in your state, as well as green car loans to save money on an eco-friendly vehicle.
The Results of the June 2022 Fed Meeting
The buzz around the June 14 Fed meeting focused on controlling inflation.
Sarah Foster, senior US economics reporter at Bankrate, explains, “The Fed is accelerating borrowing cost hikes as consumers feel the biggest inflationary blow to their purchasing power in 40 years.” With the benchmark rate set at 1.50-1.75, this inflation hit will hit consumers in ways Americans haven’t had to deal with since the early 1990s.
“Policymakers haven’t raised interest rates more than the standard quarter point several times a year since 1994,” Foster said. “And when it’s all said and done, the Fed could raise its highest interest rate since the 1980s this year. All of that means that the Fed’s policy this year will not be reminded of the number of rate hikes, but of the number of percentage points that interest rates are rising.”
High inflation figures put pressure on an already tight market
The increased benchmark rate is just one factor as to why buying a car is so expensive right now. “Higher car loan rates are just an additional burden on top of the already high price pressures and supply chain bottlenecks that have pushed up the price of both new and used cars,” said Foster.
But Foster does offer some encouragement. “As with all corners of personal finance, getting the best possible deal on your car loan comes down to shopping for both the right car and loan, and keeping your credit score as strong as possible.”
Current state of the car buying market
Drivers looking to purchase vehicles at this time face high prices and a scarce vehicle inventory. Kelley Blue Book reported that the cost of new vehicles rose to $47,148 in May 2022, a dramatic 13.5 percent increase from May last year.
According to Experian, drivers who financed used cars paid $503 and those who financed new cars paid nearly $630 per month. The cost of purchasing used vehicles also rose 1.8 percent in May, after three months of falling prices.
Rising inflation is just one factor that has led to higher car costs. The auto industry is still working to catch up on the far-reaching effects of the microchip shortage and widespread inventory problems. Fortunately, indicators show that auto production should return to pre-pandemic levels soon. Waiting to buy can be worth it.
In addition, drivers deal with much more than just expensive vehicles. According to AAA, gas prices hit record prices, even surpassing $5 a gallon on June 14 — an increase of nearly 50 percent over the past year. Unfortunately, the timeline for the return of gas prices to normal is largely unknown due to the extent to which it is affected by the war between Russia and Ukraine.
All of this culminates in a particularly challenging time for the masses of Americans who don’t have the luxury of waiting for inflation to subside before buying a car as important to their lives as transportation, explains Foster.
it comes down to
While it’s true that a high benchmark rate has a tangential impact on your available rates, it’s not all bad news. As the FOMC tries to control inflation, there are still ways to save money at the gas station and financing your vehicle.
Stay on top of the latest news from the Federal Reserve, compare available loan rates, and understand how future changes could affect you and your budget. In the end, patience is the best option – if you can keep it up.