Understanding the Impact: Fed Rate Cuts and Your Car Loan Rates

So, you've probably heаrd the buzz аbout the Fed cutting interest rates for the first time in over four yeаrs, right? Well, if you're thinking this might make cars cheaper or easier to finance right off the bat, I've got a bit of a reality check for you.

First off, while the Fed's rate cut—a cool half a percent—sounds like great news, don't expect to see a big drop in auto loan rates just yet. Right now, rates for financing a new car are still hovering around 9.61%, and nearly 14% for used cars, which are pretty steep figures according to the folks over at Cox Automotive.

Jonathan Smoke, the chief economist at Cox, mentioned thаt, historically speaking, we’re deаling with some of the highest rаtes in over two decades. And while there’s a bit of light at the end of the tunnel with the Fed's recent move, it's not going to magically fix the affordability issues overnight. It looks like we might see some relief in auto loan rates by early next year, but not much sooner.

Why the wait? Well, unlike home loans which have seen some rate reductions recently, car loan rates are tied more closely to long-term bond yields. These depend on how loans are performing over time, and, spoiler alert, auto loan delinquencies have been on the rise lately. Although they're not as bad as during the Great Recession, they're still higher than before the pandemic hit.

To pile on, car prices are still not back to their pre-pandemic "normal." Both new and used car prices had shot up due to COVID and the supply chain chaos that followed. Even though they've come down a bit from their peak, they're still pretty high. For instance, the average financing for a new vehicle back in August was over $40,700 with terms lasting almost six years—that's about $178 more per month compared to the cost before the pandemic!

Jessica Caldwell from Edmunds pointed out that new vehicle sales even dipped a bit in the third quarter. The main culprits? Those stubbornly high prices and interest rates.

But here’s a silver lining: if the Fed keeps lowering rates, monthly payments could get a bit more bearable. BofA Securities crunches the numbers to say that each percentage point drop in the Fed rate could reduce average monthly car payments by around $20.

So, hang tight if you’re looking to finance a new ride. Relief in car loan rates might not be immediate, but it’s on the horizon. And who knows? A little patience could end up saving you a bundle on your next car.