Jerome Powell, chairman of the Federal Reserve, said earlier today that inflation is on its way back down to reasonable levels — levels that would permit the Reserve to start lowering the interest rates it sets for overnight lending between banks. That change can effect everything from mortgages to credit cards, but how will it impact your next auto loan?
Well, for the prospective buyers out there, you’re in luck: A reduction in fed interest rates should mean a reduction in your next car loan. Your auto interest rates are based on myriad criteria, from your credit score and history to your down payment, but lenders do factor the Fed’s interest rates into their math indirectly.
The rates set by the Fed aren’t hard and fast laws, they’re targets and ranges. Those target ranges apply to overnight loans between banks, who lend each other money overnight to settle up accounts and ensure they have enough sitting in the federal reserve to cover their customers. Those rates, charged between banks, form the basis for a bank’s prime rate, the amount it charges its bestest most favoritest customers, like corporations. That prime rate then becomes the benchmark for the rest of that bank’s loans, including — you guessed it — car loans.
Auto interest rates may well be below a bank’s prime rate. Bank of America, right now, offers rates as low as 5.79 percent for new car purchases, far below the bank’s prime rate of 8.5 percent. Still, the prime rate is a major factor in pricing out those auto loan options, even if the resulting decision means undercutting the baseline.
When the Fed’s rate guidelines drop, overnight lending rates fall in turn. When those come down, so do the prime rates that banks charge their customers. When that baseline is lowered, so are the rates offered for car loans. It’s an economic Rube Goldberg machine, with far more complicated math than most individuals ever consider, but it ends with falling fed rates being a good thing for you and your next car purchase.