May 19, 2022

What the Fed’s Interest Rate Increase Means For You

Prices for new and used vehicles have skyrocketed so much in the past year that interest rates may seem like an afterthought. But these rates are expected to rise, too.

The average interest rate on new car loans was 4.39 percent in February, relatively flat from a year ago, according to Dealertrack, which provides business software to dealerships. The average for used vehicles was 7.83 percent in February, down from 8.25 percent.

Car loans tend to track the five-year Treasury, which is influenced by the federal fund rate — but that’s hardly the biggest factor in determining the rate you’ll pay.

The rate a borrower qualifies for depends on credit history, the type of vehicle, the loan term, down payment and other factors. Borrowers with poor credit scores may pay 20 percent or more, while those with pristine credit might qualify for rates near zero, said Jonathan Smoke, chief economist at Cox Automotive, an industry consulting firm.

“There is far more variation in auto lending than in, say, the mortgage market because there are more credit types,” he added. “Anyone can get an auto loan.”

Though the typical car payment has reached its highest levels since 2012, the latest increase isn’t expected to make a meaningful difference — at least not yet.

“Car loan rates will move up as the Fed hikes interest rates, but it will be a nonissue for car buyers because it has such a limited impact on monthly payments,” said Mr. McBride, adding that the difference of a quarter percentage point on a $25,000 loan is $3 a month. “Nobody will need to downsize from the S.U.V. to the compact because of rising rates,” he said.

Article source: https://www.nytimes.com/article/federal-reserve-rate-increase.html

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