How the Fed Affects Auto Loan Rates

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The Federal Reserve is a complex facet of the American economic system. With meetings held eight times a year, the Fed helps dictate how money is regulated. One of its tasks is to set a benchmark interest rate for consumer loans, which private lenders use to set their own rates. If the Fed raises the federal funds rate at one of its meetings, you can expect to pay more to borrow money for a mortgage, personal loan, or car loan.

How Fed Rates Affect Auto Loans

Auto loan rates are dictated by time of year, type of vehicle, borrower’s credit rating and more. But the Fed sets the benchmark rate on which auto lenders base their rates.

The choices discussed by the Federal Open Market Committee (FOMC) at Fed meetings are not the exact interest rates offered to consumers; rather, they have an impact on the cost for banks to lend to each other. For this reason, banks and lenders can change the rates they offer consumers when the federal funds rate changes. When the Fed raises interest rates, auto loan rates can also rise, or vice versa.

Why Fed Meetings Matter

Fed meetings are important because they allow anyone to get a transparent overview of the economy – specifically, how interest rates are changing and are expected to change. If the Fed announces that it is raising interest rates, you can expect to run into more expensive loans or see interest rates rise on any variable rate loans you already have.

The FOMC issues a statement after each meeting, which you can refer to to stay up to date.

How to prepare for future Fed rate changes

Preparation is the key to saving money. To be better prepared, learn about the current federal funds rate and how changing rates can impact your portfolio. The federal funds rate and auto loan rates are not the same, but there is a domino effect that hits lenders, which impacts your rates.

Although the current federal funds rate dictates the general range of auto loan rates available, your credit score still serves as the primary factor in determining how much you pay. To get a loan on the best terms, you must have a prime credit rating (usually 660 and above) and a good credit history. The federal funds rate is out of your control, but there are steps you can take to improve your credit score to prepare for future auto financing.

Next steps

When the Fed adjusts rates, the rates on available auto loans can also change. For example, in a struggling economy, the Fed may choose to lower the federal funds rate, and auto loan rates could drop in response. If the Fed raises rates, it could be more expensive to take out a loan.

Keep in mind that while the Fed’s decisions impact your auto loan, the rate you will receive is primarily determined by your own financial history. Regardless of how the federal funds rate changes, you can prepare for the cheapest loans by working to improve your credit score and your finances. It is also good to keep abreast of current loan rates before taking out a new car loan.

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