This Is How Rising Interest Rates Affect Car Buying
Here’s a headline that might look familiar: Federal Reserve Raises Interest Rates. It’s clearly a big deal, but how does it affect you? And more specifically, how does it affect car buying?
The Federal Reserve, Banks and You
You go to the bank to deposit, withdraw or borrow money, but what may not be obvious is where your bank or other financial institution does its banking. Enter the Federal Reserve, the central banking system of the United States.
- When banks have low cash reserves at the end of a business day, they can borrow money from the Fed to satisfy reserve requirements. The interest rate is referred to as the federal funds rate.
- When the federal funds rate increases, banks increase their own interest rates.
- From credit cards to mortgages, a higher federal funds rate increases interest rates on all forms of consumer debt.
Why Do Interest Rates Change?
- The Fed can help boost or temper the economy by adjusting the federal funds rate.
- When the economy is struggling, consumers aren’t spending. The Fed has an incentive to lower interest rates, and banks, in turn, offer lower interest. This makes it more affordable to get a mortgage or finance a car.
- In a strong economy, the Federal Reserve may raise interest rates to slow growth, reduce borrowing and manage inflation.
How Do Rising Interest Rates Affect Car Loans?
- When the federal funds rate rises, the increase is passed on to credit cards, mortgages and car loans.
- To put that in perspective, a $35,000 vehicle purchased at the very beginning of 2018 would cost $4,629.59 based on the average APR. At the end of the year, the grand total balloons to $5,403.88.
- Simply put, financing a new car is getting more expensive.
How to Shop for a Car When Interest Rates Are Higher
Rising interest rates will ultimately increase the overall amount you will pay for a car. That makes it more important than ever to find the best deal and get a competitive APR (Annual Percentage Rate).
- When it comes to APR, your credit score plays a huge factor in qualifying for the best rates. If you need to bring your score up, you may have some long-term planning to do. Focus on paying off your credit card balances and avoiding late payments on your bills.
- When it comes to finding the best deal, that’s where TrueCar can help. Shop for your next vehicle with TrueCar, which can help put savings in perspective relative to the MSRP (Manufacturer’s Suggested Resale Price). TrueCar also makes it easy to compare vehicles from multiple dealerships and get your TruePrice offer—the actual price you’ll pay at the dealership. You can also try timing your purchase around sales events and other promotions from manufacturers. This includes factory cash back and lease specials. Luckily for you, TrueCar has up-to-date pricing information that accounts for these offers.
If you’ve never purchased a new car or if it’s been a while, not to worry. Check out the TrueCar guide to buying a new car. We cover everything from budgeting to financing, helping you go from couch to car in five easy steps.
Some Other Helpful Car-Buying Tips
- With higher interest rates, it’s easy to make a car seem more affordable through a longer-term loan with lower monthly payments. Remember, what really matters is the total amount you pay for the car after taxes, fees, and interest.
- Interest can creep up over the years and turn your car into a financial pitfall, so be sure to keep your loan as short as possible. Three to five years is a good rule of thumb.
- You’ve probably heard that you should make a sizable down payment on your car, which is smart. We recommend at least 20%, or more if you want to lower your monthly payment.
- Here’s a follow-up to that tip. If you’ve saved up the full amount of your down payment, consider putting it on a credit card with rewards and immediately paying it off. Many cards offer anywhere from 1-2% cashback, and dealers often accept them for some if not all of your down payment.
- Lastly, don’t forget about previous model years, certified pre-owned and used cars. The potential savings can help offset the extra cost from rising interest rates, and you might even get extra features or a higher trim. And yes, you can use TrueCar to shop for the used car of your dreams.
The Bottom Line
Rising interest rates translate to higher rates for auto loans, but significant savings can help balance out increased costs. If you’re looking for a deal, you’re already in the right place.
Union members can find great deals on new or used cars near you with the Union Plus Auto Buying Program.