Over the past two years, Americans have faced a sudden auto loan rate as the Federal Reserve worked to suppress inflation by increasing federal funding rates. As of June, these efforts appear to be rewarding. The inflation rate is 2.4%, which is still above the 2% target.
The Federal Reserve rolled out its final target rate reduction for federal funds at its December meeting, but the central bank chose to hold the rates steadily at its June meeting. However, Federal Reserve Chairman Jerome Powell pointed out that “the economy is in a solid position,” indicating two potential interest rate cuts by the end of 2025.
How to save money regardless of Fed rate
Preparation is the key to saving money. So, the cost of borrowing money increases, but there are still ways to find the lowest possible rate.
Apply for pre-approval of the loan
By applying for pre-approval of your car loan, you can lock down your expected monthly expenses before signing off for your vehicle. It will give you a solid grasp of the true cost of your new car and lift your feet up to you during negotiations. You can also use pre-approved rates when comparing other loan options.
Consider trading in
Trading on current vehicles is a great way to drive in a new vehicle while reducing down payment cash. It also saves you the headache of selling your car personally.
Shopping
Experts recommend comparing at least three different loan offers when looking for vehicle financing. Do not register for the first transaction you encounter. Understand that dealer funding often costs more than funding provided by external lenders.
Focus on affordable prices
Like all large purchases, it is essential to pre-calculate your loan costs and ensure that you only sign off for vehicles that you can afford. This way you can keep up with your monthly payments and be prepared for even the worst-case scenarios.
Buy hybrid or fully electric
Buying an EV tends to have a higher purchase price, but it can be much cheaper over the lifetime of ownership. To save money with an eco-friendly vehicle, check out the special tax credits offered in your state.
Results of the June federal conference
At its December meeting, the Fed announced its third rate cut. This was a quarter percentage point, bringing the federal fund’s target rate to 4.25-4.5%. At the June meeting, the Fed was stable.
Unfortunately, the federal fund rate is no longer at its 22-year high, but it may not immediately reduce the cost of an average consumer’s car loan.
“Through history, when inflation appears to have risen or it appears to be about to take off, the Federal Reserve has been asked to take action,” explains Sarah Foster, US economy reporter at Bankrate.
They “do this by raising interest rates to cool demand and bring prices back to a better balance,” she concludes. And this is what FOMC has done so far. Increases fees to try to deal with high inflation. But most Americans see the pain before they see the profits, she explains.
Borrowers feel the pain when they fund expensive items, such as new vehicles. Lenders have raised rates over the last few years, in response to higher benchmark rates. And these higher rates, combined with the higher prices, have made them a challenging environment for many.
Even if more interest rate cuts are expected in the near future, it could take several months for car loan fees to drop significantly.
The current state of the car buying market
The price of the vehicle has been leveled, but the average trading price is still rising. According to the Kelley Blue Book, the average trading price for February 2025 rose 25% compared to February 2020.
In early 2023, new vehicle prices peaked at nearly $50,000, which, combined with higher interest rates, cost a monthly fee. Higher levels of inventory and growing vehicle incentives previously pushed higher prices down. The average new vehicle price for May 2025 was $48,799.
How much does driver spend?
Driver-funded used cars paid an average of $521 per month, while funding new ones paid $745 per month, according to first quarter data from Experian.
“If November volumes are any indication, we believe 2024 will end up with a positive note from the automotive business. Yes, prices will be higher year-on-year, but higher incentives and discounts are bringing buyers.”
Prices have risen slightly from the previous year, but prices for new cars have leveled compared to the past few years, and discounts have also increased.
Conclusion
It is true that sudden benchmark rates affect available rates, but that’s not all bad news. FOMC has a lower base rate, lower vehicle prices, and there are still ways to save money when funding the vehicle.
Stay up to date with current Federal Reserve news, understand how future changes will affect your budget, and compare available loan fees.
