Interest rates will remain high through the end of summer, as the Federal Reserve yesterday declined to make a change. That means that, although most car prices are on the decline, monthly payments on a new car will remain high for many Americans.
How the Fed Affects Your Car Loan
The Federal Open Market Committee of the United States Federal Reserve, commonly called “the Fed,” sets the interest rate for overnight loans between banks. That interest rate trickles down through the economy, influencing the rate banks charge on credit cards and loans.
The rate has now remained at a 23-year high for a full calendar year and will stay there for at least another month.
Related: Is Now The Time To Buy, Sell, Or Trade-In A Car?
New car prices stayed relatively flat last month, remaining lower than 2023 prices.
Used car prices fell in June, now sitting a full $1,700 less, on average, than last summer.
But most Americans don’t pay cash for a car. They borrow money to buy it, then pay off that loan gradually. Borrowing costs remain stubbornly high. That has made affording a new car harder this summer and has lenders tightening their credit standards.
Fed Has Tunnel Vision On Housing
The Fed is keeping interest rates high because of housing costs, says Cox Automotive Chief Economist Jonathan Smoke.
Cox Automotive owns Kelley Blue Book.
But, he cautions, “Keeping rates at such a restrictive level has dubious chances of making housing cheaper when in fact the problem is mostly caused by insufficient supply.” The population continues to grow, he notes, and construction of new housing isn’t keeping pace. “Waiting is likely not the solution, but the Federal Open Market Committee wants to wait.”
High Rates Are Changing Smaller Buying Habits
While it waits, a tight and expensive credit market keeps Americans from spending – even on housing and cars.
While the Fed waits for the housing market to change, Smoke says the problem works deeper into the economy. “Interest expense on credit cards appears to be crowding out spending on goods and services and is likely contributing to delinquencies and defaults on credit cards and auto loans.”
That partly explains why consumers continue to report worries about the economy despite wage and income gains, low unemployment, and declining inflation.
“Yet with a ‘strong economy,’ defaults are on track to be their worst since the Great Recession. That is not a good sign,” Smoke explains. High borrowing costs explain the problem.
Car Shoppers Might Want To Dig In To Wait
Those thinking about shopping for a new car might want to wait. “Relief is not right around the corner,” Smoke warns. The Fed may cut rates at its September meeting, but “it is doubtful that auto rates will rapidly decline as soon as the Fed starts cutting.”
“Once the Fed Funds Rate is headed for neutral, the average rate on new auto loans is likely to end up between 7.5% and 8%. Given what the Fed communicated today, it is not likely that auto loan rates will decline much before year’s end,” he says.
Waiting may be the right move for many households, but it’s bad news for the auto industry.
