The Federal Reserve’s recent interest rate cut has stirred up conversations across the financial world. For car shoppers, this move can lead to some important changes when financing a vehicle. In September, the Federal Reserve made its first interest rate cut in almost a year, reducing the rate by 0.25%.
While the decision primarily affects home buyers and those looking to finance larger loans, it also has significant implications for car buyers. Here’s a closer look at what this change means for those looking to finance their next car purchase.
Interest Rate Cuts: What’s Changed for Car Buyers?
In response to the interest rate cuts, the auto loan landscape has shifted, especially for consumers with excellent credit. Before the rate cut, auto loan rates for a term of 73 to 84 months were as high as 6.69% APR. After the Federal Reserve’s decision, these rates dropped to 6.49% for borrowers with excellent credit. While this 0.25% decrease might seem small, it can make a noticeable difference when it comes to long-term financing.
For example, if you were to finance a $40,000 car loan for 72 months at 6.49% APR, you would pay $8,402 in total interest. Before the rate cut, the same loan at 6.69% APR would have resulted in $8,674 in interest. Over the life of the loan, that’s a difference of $272, which, while modest, can add up for buyers who are already stretched thin with high car prices.
A lower interest rate is great – said Jessica Caldwell, head of insights at Edmunds, an online automotive resource.
Most people are financing their vehicles to some degree, so it really makes a big difference.
This highlights the positive impact that even a modest decrease in interest rates can have on car buyers who rely on financing, according to USA Today.
Who Benefits the Most from Interest Rate Cuts?
The effects of the interest rate cuts can vary depending on the type of vehicle you’re purchasing. According to Jessica Caldwell, new car buyers may not feel the full impact of the rate cut because automakers frequently offer subsidized interest rates as part of promotional deals. These incentives are often used to attract buyers, especially when the Federal Reserve drops its rates.
There’s two things that happen in car loans, on the new vehicle side, a lot of automakers offer some sort of subsidized interest rate in the form of incentives to get people to buy their car. A lot of times when the Fed drops interest rates … they’re not necessarily always reflected in the data, because [automakers are] already subsidizing these interest rates – Caldwell explained.
However, when it comes to used vehicles, the rate cuts can be more pronounced. Used car loans are often more susceptible to market shifts, and the interest rate cuts by the Federal Reserve may offer more substantial relief for buyers in this category. The exception to this is certified pre-owned vehicles, which typically have more stable financing rates.
On the used car side … we probably would see a little bit more of an effect on what the Fed does for used vehicles, with the exception being certified pre-owned vehicles. I think that used would see more of a reaction to what the Fed does than the new vehicle side – Caldwell said.
The key takeaway is that interest rate cuts benefit everyone who is borrowing money, which is the majority of Americans.
The Impact of Interest Rate Cuts on Lease Deals and Electric Vehicles
Another area where interest rate cuts can make a difference is in leasing. According to Caldwell, lowering the money factor (the interest component of a lease) can significantly reduce your monthly payments. Currently, about 20% of new vehicles are leased, meaning one in five buyers could see a reduction in their monthly lease payments thanks to lower interest rates.
If you can get a lower money factor, that is going to lower your monthly payments – Caldwell noted.
If the interest rates are lower, it’s going to make the money factor lower, which is effectively going to lower your monthly payment, which is what everybody really wants to do.
For electric vehicles (EVs), the situation is more complex. With the elimination of the federal EV tax credit, many potential buyers are reconsidering their options. More than 70% of new EVs sold at dealerships are leased rather than purchased outright. This is where the interest rate cuts can influence consumer behavior.
It sort of is a different beast, and that’s why I think you see more people opting to lease an EV rather than buy one – Caldwell said.
And that could change now, because now that the federal tax credit has been eliminated, we may see a different buyer behavior; but, it’s only been a few days since that’s happened, so it’s hard to say.
Key Considerations for Car Shoppers in Light of Interest Rate Cuts
While interest rate cuts are certainly an opportunity for car buyers to secure better financing terms, there are a few important factors to consider before making a purchase. First, your credit score plays a pivotal role in the rate you’ll receive. Consumers with higher credit scores will benefit the most from the interest rate cuts, as they will have access to the lowest APRs.
Credit score is probably super important – Caldwell pointed out.
That will be really important, because a lot of times, if you’re in a certain credit bracket … that can make a big difference, especially if you’re financing for 72 months.
Additionally, it’s important to evaluate your driving habits and how long you plan to keep your vehicle. While interest rate cuts may make borrowing more affordable, car prices are still at historic highs.
I think people, they really need to take a look at what their driving habits are – Caldwell advised.
Sometimes people just … want something new.
Given the current market conditions, it’s crucial to assess whether used, new, or certified pre-owned vehicles fit your needs best.
Finally, as Caldwell suggests, buyers should take a long-term view, considering factors like interest rates, loan terms, and vehicle prices.
When you take into account the total package of price, interest rate, the length of how long you’re going to own this vehicle, I think that probably is important to keep in mind – she said.
