Car interest rates are going up as the Fed quells inflation

Inflation and its impacts are likely not going away anytime soon. That means high car loan interest rates will likely linger, too. The Federal Open Market Committee is holding the federal funds rate at historic highs in hopes of addressing high inflation, which tends to drive higher rates on consumer loan products.

So, are car interest rates high right now? Unfortunately, the answer is yes. If you plan on buying a car soon, it’s important to understand and prepare to face these factors.

Why are car interest rates so high?

Choices by the Federal Reserve affect the benchmark rate, which has a domino effect on the cost of vehicle financing. Although a driver’s rates depend on several factors — including a borrower’s credit history, term length, vehicle type and more — increased inflation means higher interest rates for drivers even with perfect credit.

“One of the Fed’s core duties is to keep purchasing power in check, and they do it by raising interest rates,” explains Sarah Foster, senior U.S. economy reporter at Bankrate.

To achieve this goal, the Fed increased rates 11 times since March 2022. And lenders have been heeding the message, says Foster. “Car loan rates haven’t been this pricey since 2008.”

The Federal Open Market Committee skipped an increase for the past six meetings as of May 2024, meaning the benchmark rate remains at 5.25 to 5.5 percent.

However, most observers believe the FOMC is done raising rates for now.

According to Foster, rising interest rates make it more expensive to borrow money. And that, combined with high costs, has been like a one-two punch to Americans’ finances.

She explains that this has left many drivers “resigned to finance an exceptionally expensive big-ticket purchase at an uncomfortably high rate.”

Higher interest rates are just one result of the Feds’ goal to quell inflation. “Higher borrowing costs don’t just disincentivize spending but squeeze people out of being able to afford big-ticket items, causing the economy to slow,” Foster says.

Even if the Fed decides against raising interest rates, says Foster, Fed Chair Jerome Powell warns that high interest rates will not disappear anytime soon.

With this in mind, drivers should prepare for higher rates as the Fed continues to control high inflation.

The above increases can be attributed to the higher benchmark rate and more expensive vehicles. Stay up to date with changing news and how it affects your finances on Bankrate’s Federal reserve hub.

How to get a deal when interest rates are high

While the interest rate you receive depends on many factors, including uncontrollable ones like inflation, you can still make moves to save money regardless of rate hikes made by the Fed.

Shop around

Most lenders will have higher rates right now, but that doesn’t negate the benefit of shopping around. Compare rates and terms from at least three lenders to decide which quote is best for your needs. Pay close attention to the available APR along with the repayment term.

Calculate true ownership cost

As vehicle prices hit record highs, focusing on your budget when shopping is vital. With little wiggle room, it is best to calculate how much you can truly afford before heading to the dealership. This way, you will understand how much you need to borrow to drive your new car.

Consider an electric car

The upfront cost of an EV tends to be higher, but they do carry added benefits outside of the gas pump. By applying for a green auto loan and receiving EV tax credits, you can make back any money lost due to higher interest rates.

Lock in expected financing

One of the most sure-fire ways to get a good deal is to apply for loan preapproval, which will give you a firm idea of what your expected rates will be. Not all lenders offer this step, so look for it when shopping around.

Buy a used car

Unfortunately, new and used vehicles carry higher rates than usual, but used prices are slightly lower. If you have any flexibility in the type of vehicle you want, buying a used car can save you money on your monthly cost.

How to refinance once rates drop

One of the most effective times to consider refinancing your auto loan is when rates have lowered and your credit score has improved. The process is similar to applying for your initial loan.

1. Evaluate current loan. Before beginning your refinancing process, it is important to look at your current loan’s term and interest rates. Use an auto refinance calculator to understand potential monthly savings once you have those numbers in mind.
2. Check your credit. By understanding your credit score, you can determine your eligibility for good rates. When it comes to refinancing — just like with any loan — the better your credit, the more competitive your rates will be.
3. Shop around. Comparing at least three different lenders is the key to getting a good deal. A great starting point is the bank or lender that you initially signed off with — there may be discounts for current customers. However, not all lenders let you refinance an existing loan.
4. Receive new terms. After submitting the necessary documentation and, in some cases, paying a prepayment penalty, you will receive your new terms. Before closing the chapter on this process be sure that you pay off your previous lender.

Now might not be the best time to buy

Although many do not have the luxury of waiting to buy a car, patience may be on your side when it comes to saving money. Interest rates will continue to make borrowing money for your vehicle more expensive. So whether you plan to wait out the high rates or head to a dealership, prepare for higher prices to finance your vehicle.