Should You Wait To Buy a Car Until Interest Rates Fall?
Written by
Jake Safane
Edited by
T. Woods
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If you can’t afford to buy a car with cash, financing a vehicle tends to be a lot more expensive than it was a few years ago.
In 2021, the average car loan rate was 4.09%, while the latest data from 2023 came in at 7.03%, according to consumer credit reporting agency Experian. During that period, the average monthly lease payment rose from $513 to $597 (interest rates can also affect leasing costs), and the average monthly car payment rose from $617 to $726.
These costs also depend on factors like the amount financed, the term length, and your credit score, but in general, higher interest rates have made both buying and leasing a car more expensive.
Now, in 2024, with the Federal Reserve expected to start cutting the federal funds rates (which tends to affect other interest rates, like for car loans) is it a good idea to wait to get a new car?
“That really comes down to how badly you need a new vehicle,” said Aaron Cirksena, founder and CEO of MDRN Capital, a Registered Investment Advisor (RIA).
“It is likely that rates for all types of loans will come down some this year if the Fed does end up lowering rates, but no one knows exactly when that may be,” he added.
In other words, if you’re not in a rush to buy a car, you could potentially save money by waiting. However, the change might not be dramatic.
Even if the Fed does “lower rates, it may only be in quarter-point increments and so it may not make a very large difference in the overall monthly payment on a loan,” said Cirksena. “Overall, I would base the decision more on the need for the car and the overall deal or price you are paying rather than the loan rate alone.”
Regarding the overall deal, it’s also worth noting that car makers and dealers don’t exactly follow what the Fed does. While there’s a correlation — as their own cost of capital goes up when the Fed raises rates — a company might offer a low car loan rate to clear out inventory, for example.
Even in this current high-interest-rate environment, it’s not impossible to find 0% financing. In a recent Reddit thread, a user asked whether they should wait to buy a car until the Fed cuts rates, but they ended up finding a 0% financing deal on a new car and went ahead with the purchase.
Still, if you wait to buy a car, you also might have a wider selection of vehicles to choose from with competitive financing offers as rates come down.
Finding a Car You Can Afford
As Cirksena mentioned, interest rates shouldn’t be the only driver in your decision on whether to buy a car or wait. Even if you get a good financing deal, you don’t want to end up in a situation where you can’t afford monthly payments.
Before buying a new car, make sure you’re comfortable with the cost. Qualifying for a car loan doesn’t mean you can easily afford car payments, depending on what your other expenses look like.
So, one advantage of waiting is that you can save up more for a new car to lower the monthly cost. You can also build a larger emergency fund for things like repairs or the ability to keep up with payments if you lose your job.
When buying a car, one rule of thumb is the 20/4/10 guideline, which suggests putting 20% down on a 4-year car loan, with monthly payments that do not exceed 10% of your monthly income. However, some experts suggest even lower limits so that your car costs don’t hamper your overall finances.
Ultimately, the choice depends on what you’re comfortable with and what your financial situation looks like. Lower interest rates might help with car affordability, but that’s not the only factor.
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