Americans have been met with price increases at the supermarket, gas pump and dealer lots over the past year. As the Federal Reserve works to quell the inflation incurred from the pandemic there will be some growing pains hitting all facets of borrowing — auto loans included — while the Central Bank helps the economy return to normal.
The May Fed meeting brought a steep change moving the federal funds rate to 0.75-1 percent. And this week’s meeting brought forward similar intent, all with the focus on controlling inflation by raising the benchmark rate to 1.50-1.75.
How the Fed affects auto loans
How to save money regardless of the rate hike
The key to saving money is preparedness. So, while vehicle prices remain high and the cost to borrow money increases, there are still ways to get ahead and save money.
Apply for loan preapproval
By applying for auto loan preapproval you can lock down your expected monthly cost prior to signing off on your vehicle. It gives you a firm grasp on the true cost of your new car and gives you a leg up when it comes to negotiation. You can also use the preapproved rate when comparing other loan options.
Consider a trade-in
Trading in your current vehicle is a great way to drive off with a new car while spending less cash on a down payment. It will also save you the headaches of selling your car privately.
Shop around
It is recommended that you compare at least three different loan offers when looking for vehicle financing. Do not sign off on the first deal you come across, and understand the cost differentiation that comes with dealer financing versus that found from other lenders.
Only buy what you can afford
As with anything when it comes to large purchases it’s important to do the math ahead of time to ensure that you only sign off on a vehicle that you can afford. This way you can ensure you can keep up with your monthly payments and be prepared for even the worst-case scenario.
Buy electric
While buying EVs tend to carry a higher purchase price tag, they can be much less expensive over the lifetime of ownership. Check out special tax credits offered in your state as well as green auto 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 managing inflation.
Sarah Foster, senior U.S. economy reporter at Bankrate, explains that “The Fed is fast-tracking its hikes to borrowing costs as consumers feel the biggest inflationary hit to their purchasing power in 40 years.” With the benchmark rate now set at 1.50-1.75, this inflationary hit is going to hit consumers in ways that Americans have not had to deal with since the early ’90s.
“Policymakers haven’t hiked interest rates by more than the standard quarter-point multiple times in one year since 1994,” says Foster. “And when it’s all said and done, the Fed could end up hiking rates this year by the most since the ’80s. All of that means, Fed policy won’t be remembered this year by how many rate hikes — but by how many percentage points rates rise.”
High inflation rates add pressure to an already tight market
The increased benchmark rate is only a single factor in why buying a car is so expensive right now. “Higher auto loan rates are just an added tax on top of already-high price pressures and supply chain bottlenecks that have sent the price of both new and used cars soaring,” Foster says.
But Foster does present some encouragement. “As with all corners of personal finance, securing the best deal possible on your car loan comes down to shopping around for both the right car and loan, as well as keeping your credit score as strong as possible.”
Current state of the car buying market
Drivers looking to purchase vehicles right now have to deal with high prices and sparse vehicle inventory. Kelley Blue Book reported that new vehicle costs increased to $47,148 in May 2022, this is up a dramatic 13.5 percent from May of last year.
According to Experian, drivers financing used cars paid $503 and those financing new ones paid close to $630 each month. The cost to purchase used vehicles was also up 1.8 percent in May, following three months of price decline.
Rising inflation is only one factor that has led to increased vehicle costs. The vehicle industry is still working to catch up with the profound impacts brought on by the microchip shortage and widespread inventory issues. Fortunately, indicators do show that vehicle production should return to pre-pandemic levels soon. Waiting to purchase could be worth your while.
On top of this, drivers are dealing with much more than just expensive vehicles. According to AAA, gas prices have reached record high prices, even surpassing $5 per gallon as recently as June 14 – up nearly 50 percent in the past year. Unfortunately, the timeline for gas prices returning to normal is mostly unknown due to how much of it is affected by the Russia-Ukraine war.
This all culminates in an especially challenging time for the multitude of Americans that do not have the luxury of waiting for inflation to subside before making a vehicle purchase as vital to their life as transportation, explains Foster.
The bottom line
While it’s true that a steep benchmark rate will tangentially impact your available rates, it is not all bad news. As the FOMC works to control inflation there are still ways to save money at the gas pump and when financing your vehicle.
Stay up to date on current Federal Reserve news, compare available loan rates and understand how future changes can impact you and your budget. Ultimately, patience is the best option — if you can hold out.
How to save money on auto loans following Fed rate hike - Bankrate.com
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