Fed’s First Rate Cut Since 2020 May Lower Car Loan Costs, But Don’t Expect Miracles

The Federal Reserve has cut the federal funds rate for the first time in more than four years.

Car buyers are about to get some much-needed relief as the Federal Reserve has announced plans to cut rates by 50 basis points. This will lower the federal funds rate to between 4.75% and 5%.

Lowering the Cost of Borrowing

This rate cut will have a significant impact on car buyers, as it will lower the cost of borrowing. With interest rates climbing for years, the average new car loan rate is currently at 6.84%. The rate cut will save car buyers money and make car loans more affordable.

Economic Outlook and Justification for the Rate Cut

In a statement, the Federal Reserve acknowledged that economic activity has continued to expand at a solid pace, but progress on inflation remains somewhat elevated. They also noted that job gains have slowed and the unemployment rate has ticked up. Given these developments and an uncertain economic outlook, the Fed decided that a rate cut was the best move.

Impact on Car Loans

Car loans have seen a significant increase in interest rates in recent years. According to Experian’s State of the Automotive Finance Market report, the average interest rate for a new car loan jumped from 4.61% in 2022 to 6.84% in 2024. This rate cut will provide much-needed relief to car buyers, especially those with lower credit scores who have been paying higher interest rates. However, the savings may not be substantial. Bankrate estimates that a 50 basis point interest rate cut would only save new car buyers $8 per month on a $35,000 loan spread out over five years.

Conclusion

While the rate cut will lower car loan costs and provide some relief to car buyers, it is important not to expect miracles. The impact on monthly payments may be relatively small, but every bit of savings counts. Car buyers should take advantage of this opportunity to secure more affordable financing options.