Inflation and its effects may not go away anytime soon. That means there is a high chance that the interest rates on high car loans will also remain. The Federal Open Market Committee (FOMC) announced its third federal funding rate cut in December 2024, but the rates remain unusually high, and tend to promote higher rates for consumer loan products. Prices could remain high over the coming months as no cuts were announced after the FOMC meeting in June.
Unfortunately, this means that car loan interest rates are also higher, but they are declining. If you plan to buy a car right away, carefully compare the rates with multiple lenders. If possible, check if prices have been lowered over the next few months before purchasing.
Why are car interest rates so high?
Federal Reserve choices affect benchmark rates that have a domino effect on vehicle financing costs. The rate depends on several factors including the borrower’s credit history, length of duration, vehicle type, etc., but an increase in inflation means that even drivers with a full credit side are higher.
“One of the Fed’s core obligations is to curb purchasing power. They do that by raising interest rates,” explains Sarah Foster, US economy reporter at Bankrate. To achieve this goal, FOMC has increased its rates 11 times since March 2022. In September 2024, FOMC ultimately began reducing its target rate. However, this is still higher than historical norms, and the FOMC again chose not to cut fees after the June 2025 meeting.
According to Foster, high interest rates become more expensive when borrowing money. And it was like a one-on-two punch to the American finances, combined with the high cost. She explains that this will cause many drivers to “resign at an unpleasantly high rate of funding for very expensive big ticket purchases.”
Higher interest rates are just one of the consequences of the federal government’s goal of quelling inflation. “Increasing borrowing costs not only eliminate spending, but also squeeze people out of their way to afford big debts and slow the economy,” Foster says. Bankrate experts believe the Fed will continue until 2025. However, it is unlikely that car loan fees will drop significantly after this initial cut.
The increase can be attributed to higher benchmark rates and more expensive vehicles. Stay up to date on news changes and how it will affect your finances at Bankrate’s Federal Reserve hub.
How to get a trade when interest rates are high
The interest rates you receive will depend on many factors, including uncontrollable factors, such as inflation, but you can continue to move regardless of the fee hikes the Fed has made.
Shopping
Most lenders currently have high prices, but that doesn’t deny the benefits of shopping. Compare prices and conditions from at least three lenders to determine the best estimate for your needs. Pay close attention to available APRs along with the repayment period.
Calculate the true cost of ownership
With vehicle prices reaching record highs, it’s important to focus on your budget when shopping is essential. There’s little room for wiggling, so it’s best to calculate how much room you have before heading to the dealer. This way you will understand the amount you need to rent to drive a new car.
Apply for pre-approval
You can apply for prequalification or preapproval with most lenders. It may also be useful during negotiations at the dealer. With the loans already in place, you know exactly that you can afford to negotiate lower fees through the seller’s financing. Not all lenders offer this step, so look for it when comparing options.
Consider an electric or hybrid vehicle
Although EVs tend to have higher upfront costs, electric vehicles and hybrids have additional benefits besides gas pumps. Auto loan fees and vehicle prices are currently high, but there are ways to reduce costs.
By applying for a green car loan and applying for an EV tax credit, you can recover lost money due to higher interest rates. It’s also a budget-friendly option that will help you save money with the pump if your vehicle doesn’t need to be fully electric.
I’m buying a used car
It may seem counterintuitive as used cars cost more than usual, but buying a used car can save you money by choosing a lower priced car. It also helps you save money every month. According to Experian data, the average payment for used cars was $523 in the third quarter of 2024. Even a slightly higher interest rate on a used car saves money, compared to an average new payment of $735.
If the fees go down, how to refinance
One of the most effective times to consider refinancing your car loan is when your fees drop and your credit score improves. This process is similar to applying for an initial loan, although there are some extra steps in the backend.
- Evaluate your current loan. It is important to look into the current loan term and interest rate before starting the refinance process. With an automatic refinance calculator and having those numbers in mind, you will understand potential monthly savings.
- Please check your credits. Understanding your credit score will help you determine the eligibility for the appropriate fee. When it comes to refinancing, like any other loan, the better your credit, the more competitive your fees.
- Shopping. Comparing your refinance rate with at least three different lenders is a significant key to getting it. Just like with your first car loan, you can calculate potential costs and incorporate them into your budget, which will help you avoid spending more than you need to.
- You will receive a new term. If approved, the new lender will usually send the payoff amount to the current lender. Follow up with both lenders to make sure everything is done on time and accurately.
This may not be the best time to buy
Many people don’t have the luxury of waiting to buy a car, but when it comes to saving money, patience may be on your side. Interest rates keep your money more expensive for your car. So whether you wait for a high fee or head to the dealership, prepare for a high price to fund your vehicle.
