The Fed Just Raised Interest Rates, Here Is How It Can Affect Your Auto Loan

The Federal Reserve recently raised its key interest rate by 0.75% to combat inflation. This will increase how much consumers will pay on certain debts like credit cards, mortgages, and student loans. Unfortunately, that increase can also affect your car loan. Here’s how.

How does the increased interest rate affect car loans?

A sign in the window of the Anchor Savings Bank advertising car loan rates.
A sign in the window of the Anchor Savings Bank advertising car loan rates. | Barbara Alper/Getty Images

Auto loan lenders use the Federal Reserve’s key interest rate to determine the financing rate when you apply for an auto loan. According to CNBC, “this won’t affect borrowers already locked into fixed-rate financing, but new car loans or those with variable-rate financing will likely go up in cost.” The 0.75% interest rate increase brings the Fed’s policy rate to a range of 2.25 – 2.5%.

How much will it go up? According to calculations made by Bankrate.com, a 2.25% year-to-date increase would equate to a $36 higher monthly payment on a 5-year loan for $35,000. That might not sound like much, but considering that’s an extra $2,160 tacked onto the loan over five years, those small percentages sure add up. In that case, it’s important to do your research on the available auto loan rates through multiple lenders.

Buying a new car? Here are some tips on applying for an auto loan

Volvo V70 vehicles sit in a car park before transportation.
Volvo V70 vehicles sit in a car park before transportation. | Casper Hedberg/Bloomberg

If you are currently in the market for a new car and are planning to finance it, don’t worry, you may be able to find a good rate. According to Bankrate.com, most new car loans are in the 3-4% APR range as of July 2022. However, keep in mind that the rate you obtain can vary depending on your credit score, credit history, income, and down payment amount.

Before shopping around for auto loans, it’s a good idea to take a look at your current credit situation. That way, you will know what to expect when you start to apply for loans. Also, if there are any errors or issues that you need to clean off your credit report, then you can address that beforehand.

To receive the top-tier interest rate for an auto loan, most lenders look for a 660 credit score or above. However, remember that your credit score on apps like Credit Karma can be a little misleading. Most lenders issuing auto loans follow the FICO 8 scoring model instead of the Vantage model that apps like Credit Karma use. Although, we still suggest checking those apps to give you an idea of where you stand.

Remember to negotiate the price of the car, if possible

A visual of auto loan.
A visual of auto loan. | Aytac Unal/Anadolu Agency/Getty Images

While inventory shortages remain, there is still the possibility of negotiating down the price of the car you’re interested in. It depends on the make and model of the car you’re buying, however. Either way, it never hurts to try and get a better price for the car in order to offset the higher interest rate. If you can’t negotiate the price of the car, see if you can put a larger down payment toward the loan.

If so, the lenders are more likely to grant you an auto loan and have a lower monthly payment. Here are more car-buying strategies to use in 2022.

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