The Federal Reserve held rates steady yesterday – the third straight time it has met and made no change. The Fed hasn’t needed to make major changes lately. The market is making them.
Auto loan rates are now in decline.
The Federal Open Market Committee of the U.S. Federal Reserve, commonly called “the Fed,” controls the interest rate for overnight loans between banks. That rate then governs the calculations banks use to make every other loan, including car loans.
The Fed spent much of 2023 raising rates to try to put the brakes on inflation. It stopped in July, instead issuing cautionary statements that it was willing to raise rates further if that’s what it took to bring prices under control.
Until recently, automotive lenders responded by raising rates themselves. That trend may be over, says Cox Automotive Chief Economist Jonathan Smoke.
“Auto loan rates have declined in December,” he explains. Cox Automotive is the parent company of Kelley Blue Book.
Related: Average New Car Price Down Year-Over-Year For Third Straight Month
Declines are modest so far. The average new car loan rate almost reached 10% in October and is now down to 9.6%. The average used car loan rate peaked at 14.4% in mid-November and is now down to 14%. Those rates remain historically high. But the trend is significant, Smoke says.
“High rates clearly limit who can buy expensive goods that require financing. High rates also impact businesses like dealers who carry costly inventory,” he says.
And rates aren’t the only factor affecting your ability to borrow money for a car. Credit conditions tightened for most borrowers last month as lenders approved fewer loans, asked for higher down payments, and shortened loan terms.
The Fed has other tools at its disposal, Smoke notes. “We could see rates remain high or even increase from where they are today because of the continuing liquidation of the Fed’s balance sheet, otherwise known as Quantitative Tightening (Q.T.), combined with substantial new debt issuance by the U.S. Treasury.”
The economy, Smoke says, has so far resisted tipping into the recession both dealers and buyers fear. “With lower prices on new vehicles and depreciation returning to used vehicles, affordability has modestly improved despite the increase in rates,” he says.
In 2024, Smoke suggests, affordability should improve “as prices continue to fall thanks mostly to discounts and incentives and as rates hopefully begin to decline as well. It is now a question of when that starts and by how much.”
