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Will the Interest Rate Hike Increase My Car Payment?

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Every time the Fed increase its interest rates, it costs more to borrow. With the Federal Reserve raising its federal funds rate by three-quarters of a percentage point on Wednesday — and with more rate hikes expected in the coming months — financing a car will cost prospective buyers or leasers a lot more this year.

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Like federal student loans, auto loans are fixed in term, meaning that existing loans will not be impacted by the Fed’s rate increases. Where Americans will feel the pinch is through higher new borrowing costs, but it won’t be significant due to how the automotive industry is operating right now.

According to The New York Times, the average new car loan interest rate was 5.08% in May and used vehicle average rates hit 8.46%, both up nearly 1% from December 2021. While the rate boosts are somewhat significant, the costs of buying a new or used car and the price to fill up at the pumps eclipse any concerns about rising borrowing rates.

Not long ago, the chances of buying a used car were slim unless you were prepared to pay over-inflated sticker prices. New car manufacturing was stunted by ongoing supply chain disruptions arising during the pandemic and exacerbated by the war in Ukraine. The used vehicle market is getting back to normal, but is still stuck in an awkward state. Demand for used cars probably won’t subside because of the price, and limited supply of new vehicles continues to be problematic.

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Regarding the Fed increasing its benchmark interest rate, overall interest rates on car loans might not be troubled much by the Fed hike anyway since car loans are so reliant on the buyers’ individual credit score and history. The repercussion from any Fed rate increase depends on how lenders react to the Fed’s rate hikes and what they feel they can charge buyers through financing.

Cox Automotive’s latest “Market Insights” report hits the nail on the head in stating, “The Fed’s actions will not fix the supply problem, but when production does eventually start to improve, demand may not be able to keep up without a material change in incentives and pricing.”

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As to when new-vehicle supply improves is anyone’s guess at this point. Cox hasn’t seen any indications that it is moving in the right direction and probably won’t before next year.

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