The Federal Reserve's Federal Open Market Committee is meeting on interest rates this week, and it's widely expected to increase the target fed funds rate by 25 basis points, or 0.25%. Auto loan interest rates tend to follow the lead of the fed funds rate, so here's what that could mean for the rate's you can expect, and what that could mean to your wallet.
How Fed rate hikes affect auto loans
Unlike credit cards, the interest rates for which are often explicitly tied to the Fed's short-term interest rates, auto loans aren't directly impacted. In other words, don't be surprised if the auto loan rates offered by your local bank don't immediately shoot up by precisely 0.25% as soon as the Fed's decision is announced (assuming that we get the hike the markets expect).
Having said that, auto loan interest rates do tend to respond to Fed hikes, so it's safe to assume that on average, auto loan interest rates will gravitate toward a level about a quarter-point higher than the present level.
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Current auto loan rates
The APR, or interest rate you receive on your auto loan depends on a few factors, such as whether the car is new or used, the term length of the loan, any incentive rates offered by the dealer, and if you have stable employment. The most important factor, however, is your credit score.
With that in mind, here are the average interest rates in the U.S., as of June 1.
|
FICO Score Range |
48-Month New Auto Loan |
60-Month New Auto Loan |
48-Month Used Auto Loan |
|---|---|---|---|
|
720-850 |
3.565% |
3.608% |
4.306% |
|
690-719 |
4.923% |
4.962% |
5.915% |
|
660-689 |
6.972% |
7.025% |
8.08% |
|
620-659 |
9.658% |
9.729% |
10.678% |
|
590-619 |
14.005% |
14.074% |
15.502% |
|
500-589 |
15.176% |
15.236% |
16.806% |
Data Source: myFICO.com.
So what impact would an extra 0.25% have on your loan?
To illustrate the impact of a quarter-point Fed rate hike on your next auto loan, let's consider a couple of scenarios.
First, let's say that you're a borrower with an excellent FICO score of 800, and you're buying a $35,000 new car with a 60-month loan. Based on the current average interest rate, this loan would have a monthly payment of $638, and you could expect to pay $3,304 in interest over the five-year term of the loan. A 0.25% increase in your interest rate would translate to a $642 monthly payment, and you would end up paying an additional $236 in interest. (Note: Figures may not multiply exactly, due to rounding.)
Next, let's say that you're a subprime borrower with a 550 FICO score, and that you want to buy a $15,000 used car with a 48-month loan. With the current average interest rate, you could expect a $431 monthly loan payment, and a total of $5,703 in interest. A quarter-point increase would raise your monthly payment by $2, and you'd pay an additional $93 in interest.
To sum it up, the short answer to the question of how much would a Federal Reserve rate hike affect your next auto loan is "not much." Your payment could go up by a few dollars per month, but it probably won't make a significant difference in terms of affordability.
The Fed might not be done just yet...
While a single rate increase, like the one expected this week, probably wouldn't make too much of a difference, keep in mind that this isn't expected to be a "one-and-done" situation. In fact, this would be the latest in a series of quarter-point increases that is expected to continue for at least the next couple of years.
So, while a 25-basis-point interest rate hike wouldn't make too much of a difference, if the Fed continues to raise rates over the next few years, and the national averages go up by 1%, 2%, or more, it could eventually start to make a significant difference in how much car you can afford.
