How will auto loans be affected by the Fed’s rate hike?
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The Federal Reserve’s plan to raise interest rates this year will likely mean higher rates for auto loans as well, but it probably won’t have a huge impact on auto sales or terms than many car buyers get, according to experts.
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In its recent 2022 outlook for the auto industry, Cox Automotive said it expects auto loan rates to be higher by the end of 2022. Historically, however , rates would still be “low and attractive”. And although higher rates come at a time of soaring inflation for new and used vehicles – the average price of both recently set new records – the impact on car sales should be minimal. .
The rate increase will have “no significant impact on car sales”, said Jonathan Smoke, chief economist at Cox Automotive, adding that the global shortage of microchips will have a much greater impact. On the contrary, higher rates could slightly increase sales.
“As rates start to rise, it usually slows demand down a bit as consumers try to get in before rates get too high,” Smoke told GOBankingRates in an email.
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Other industry watchers hold a similar view.
“A rise in interest rates has minimal impact on the affordability of auto loan rates,” Greg McBride, chief financial analyst at Bankrate.com, told MarketWatch. “The quarter-percentage-point difference equates to a difference of $3 a month for a car buyer who borrows $25,000.”
Higher overall rates might not have a huge impact on the loan terms car buyers get, as these are generally more influenced by factors such as a customer’s credit rating and credit history. . Much depends on how lenders react to Fed rate hikes.
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“It is possible that the rates offered by lenders will continue to be relatively favorable compared to what the Fed is doing and what the bond market is doing, but lenders are likely to manage risk in another way if the Yield spreads don’t expand,” Smoke said. . “For example, higher down payments might be required, terms offered might be shorter, thereby increasing payments, or lower credit applicants might have a harder time being approved.”
As for consumers who worry about the combination of higher rates and rising sticker prices: the best strategy is to be flexible with what you’re looking for in a car.
“Consumers looking to save money can be flexible about color, trim level and other options,” Smoke said. “And you’ll probably get a better deal if you buy a sedan rather than an SUV or a pickup.”
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