How to Save Money on Auto Loans After a Fed Rate Hike
Americans have faced price increases at supermarkets, gas stations and dealerships over the past year. As the Federal Reserve scrambles to quell pandemic-driven inflation, mounting difficulties will hit all facets of borrowing – including auto loans – as the Central Bank helps the economy return to normal .
The Fed’s May meeting brought a sea change, pushing the fed funds rate to 0.75-1%. And this week’s meeting presented a similar intention, all focused on controlling inflation by raising the benchmark rate to 1.50-1.75.
How the Fed Affects Auto Loans
The Federal Open Market Committee (FOMC) sets the benchmark rate, on which auto lenders base their rates.
How to Save Money Regardless of Rising Rates
The key to saving money is preparation. So while vehicle prices remain high and the cost to borrow money increases, there are still ways to get ahead and save money.
Request a loan pre-approval
By applying for auto loan pre-approval, you can lock in your expected monthly cost before signing on for your vehicle. This gives you an accurate idea of the real 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
Trading in your current vehicle is a great way to walk away with a new car while spending less money on a down payment. It will also save you the headache of selling your car privately.
Compare the prices
It is recommended to compare at least three different loan offers when looking for car financing. Don’t sign the first deal you come across and understand the cost differentiation that comes with dealer financing versus other lenders.
Only buy what you can afford
As with all major purchases, it’s important to do the math ahead of time to make sure you’re only buying 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.
Although electric vehicles tend to cost more to buy, they can be much cheaper for the duration of their ownership. Find out about special tax credits available in your state as well as green auto loans to save money on a green vehicle.
The results of the June 2022 Fed meeting
The buzz surrounding the June 14 Fed meeting focused on inflation management.
Sarah Foster, senior US economics reporter at Bankrate, explains that “the Fed is accelerating its borrowing cost hikes as consumers feel the biggest inflationary blow to their purchasing power in 40 years.” With the benchmark rate now pegged at 1.50-1.75, this inflationary blow will hit consumers in ways Americans haven’t had to deal with since the early 1990s.
“Policymakers haven’t raised interest rates more than a standard quarter point multiple times in a year since 1994,” Foster said. “And when all is said and done, the Fed could end up raising rates this year in the biggest way since the 1980s. All of this means that Fed policy will not be recalled this year by the number of hikes rates, but by the number of percentage points of rate increases.
High inflation rates add pressure to an already tight market
The benchmark rate increase is only one factor as to why buying a car is so expensive right now. “Higher car loan rates are just another tax on top of already high pricing pressures and supply chain bottlenecks that have driven the price of new cars and car prices skyrocketing. occasion,” says Foster.
But Foster offers some encouragement. “As with all aspects of personal finance, getting the best possible deal on your car loan comes down to finding both the right car and the right loan, as well as keeping your credit score as strong as possible.”
Current state of the car buying market
Drivers looking to buy vehicles right now have to deal with high prices and a sparse vehicle inventory. Kelley Blue Book reported that new vehicle costs rose to $47,148 in May 2022, a dramatic 13.5% increase from May of last year.
According to Experian, drivers who financed used cars paid $503 and those who financed new ones paid nearly $630 per month. The cost of buying used vehicles also rose 1.8% in May, following three months of falling prices.
Rising inflation is just one of the factors that has driven up vehicle costs. The automotive industry is still struggling to catch up with the profound impacts caused by microchip shortages and widespread inventory issues. Fortunately, indicators show that vehicle production should soon return to pre-pandemic levels. Waiting to buy might be worth it.
On top of that, drivers are dealing with more than just expensive vehicles. According to AAA, gasoline prices have hit record highs, even topping $5 a gallon as recently as June 14, an increase of nearly 50% over the past year. Unfortunately, the timeline for gas prices to return to normal is mostly unknown due to the share of it affected by the Russian-Ukrainian war.
All of this culminates in a particularly difficult time for the multitude of Americans who don’t have the luxury of waiting for inflation to subside before buying a vehicle as vital to their lives as transportation, says Foster.
The bottom line
While it’s true that a high referral rate will indirectly impact your available rates, it’s not all bad news. While the FOMC struggles to control inflation, there are still ways to save money at the gas pump and when financing your vehicle.
Stay up to date with Federal Reserve news, compare available lending rates, and understand how future changes may impact you and your budget. In the end, patience is the best option – if you can hold out.