If you’re one of many Americans wanting to refinance your car, we’ll walk you through the steps. Refinancing your car includes several steps: shopping around, gathering the necessary documents, pre-qualifying, submitting an application, and finalizing the loan. If you're one of the many people struggling to keep up with…
The Federal Reserve approved a plan to raise interest rates. Does this impact your auto loan?
Are auto loan interest rates going up? That’s the question consumers everywhere are asking as the rising cost of goods takes a bigger bite out of their paycheck.
If you’re shopping for a car or have an existing auto loan, the rising rates could put a crunch on your budget. Let’s take a closer look at what the changes could mean for your car loan experience.
What Happened to Auto Loan Interest Rates in 2021?
Auto loan interest rates were relatively stable in 2021.
According to the St. Louis Fed, the average interest rate on new auto loans of 60 months dropped from 5.05% in May 2021 to 4.60% in August 2021. The average rates stayed around this mark until February 2022. At the tail end of 2021, the average interest rate for new auto loans with terms of 60 months increased slightly to 4.67%.
This interest rate stability was mostly thanks to the Federal Reserve’s decision to keep interest rates low.
Throughout 2021, auto loan borrowers enjoyed historically low interest rates. And luckily, many consumers were able to take advantage of this low point. In fact, RateGenius found that consumers saved an average of $1,200 in annual savings when they refinanced in the first two quarters of 2021.
Are Auto Loan Interest Rates Going Up in 2022?
In March 2022, the Federal Reserve announced its intention to raise rates by 0.25%. That’s the first interest rate hike since 2018, and a stark change from the steady rate decreases throughout the pandemic.
The Fed’s decision to raise interest rates was based on a range of factors. But the driving reason behind it is the goal of taming inflation while keeping the labor market strong. Although there are many uncertainties in the market right now, one being how the invasion of Ukraine by Russia will impact inflation, the Fed anticipates raising the interest rate further in months to come.
As the Federal Reserve raises interest rates, auto loan interest rates will likely rise as well. With no plans announced for lowering rates, shoppers shouldn’t expect to see a sharp drop in interest rates anytime soon.
But while a rising federal funds rate will lead to higher interest rates in 2022, it’s often not a one-for-one increase. That’s because lenders have to compete for your business. Ultimately, lenders can determine what interest rate they are willing to offer based on many factors. With that, the rising interest rates on auto loans will likely be a bit more subtle than the Fed’s rate hikes.
Although interest rates might be rising in 2022, auto loan interest rates are still relatively low from a historical point of view. When compared to the average interest rate of 7.78% on a 60 month auto loan in May 2007 or the average interest rate of 6.10% on a 60 month auto loan in February 2011, the current interest rates are still very attractive.
With that, borrowers with a relatively high interest rate attached to their current auto loan should consider a refinance. It’s possible you’ll unlock major savings for your budget. The only way to know is to compare your options.
Shopping for a Car or Refinance in 2022? Here’s What To Know
If you are shopping for a car in 2022, interest rates aren’t the only thing affecting your bottom line. Although the interest rates might have been relatively stable throughout 2021, the overall auto loan market saw extensive volatility throughout the year. And that instability could carry forward into 2022.
Let’s take a look at what borrowers need to know about car shopping in 2022.
The world has become increasingly dependent on technology. You’ll find microchips in almost every electronic device in your home. So, it’s not surprising that all of our high-tech vehicles rely heavily on specialized microchips to function.
Since electronics are everywhere, it’s not surprising that there is a huge demand for these microchips. But the unfortunate reality is there is a shortage of these specialized components. And that puts a strain on all industries that rely on the chips. And the auto industry is one of the many impacted industries.
The microchip shortage was caused by a variety of factors. A global pandemic that halted factory operations seems to be the major issue. The uncertainty swirling in the economy as a result of the pandemic led the already relatively small number of microchip factories to halt operations temporarily.
Although production has since resumed, Consumer Reports doesn’t expect microchip inventory levels to return to pre-pandemic levels for another year or longer.
So, how does this impact your car buying experience?
Essentially, the microchip shortage has slashed the available inventory of vehicles. If you’ve driven past a car dealership recently, you might notice a lack of vehicles. It’s not a fluke! Many consumers are struggling to find a vehicle to buy.
If you are shopping for a new car, you’ll likely face higher prices and long wait times for new vehicles. And if you decide to look at the available used car inventory, you might feel the sticker shock. Used car values recently hit record highs, which makes even a used car purchase a major expense on consumer wallets.
Interest rates are rising
Throughout 2021, historically low interest rates were one of many factors driving demand for the auto industry.
The Federal Reserve approved its first interest rate increase of 2022. This new benchmark rate will lead to higher auto loan rates. But it doesn’t mean interest rates will suddenly become unattractive. Even with rising interest rates, the relatively slow pace should allow auto loan interest rates to stay attractive in the historic context for now.
Rising interest rates will make it more expensive for borrowers to take out an auto loan. But the expense might not be enough to slow demand significantly, especially when you consider that the auto industry is currently struggling to meet consumer demand due to the widespread microchip shortage.
Whether you are shopping for a used car loan or a new car loan, don’t forget to compare quotes from multiple lenders. Of course, the interest rate offered will vary based on your credit history. But if you can lock in a low rate, that could help your budget for years to come.
Flexibility is key
It can be a daunting time to shop for a vehicle. The microchip shortage has led to low available inventory. And attractive interest rates are a contributing factor to help encourage consumer demand.
With limited options, car buyers should consider being flexible when searching for a vehicle that suits their budget. Although letting go of your preferred vehicle options can be difficult, opening yourself to other possibilities could be the ticket to driving off the lot with a reliable vehicle that suits your needs.
For example, you could consider looking at used vehicles instead of exclusively new options. But if you aren’t willing to compromise on your vehicle of choice, then consider expanding your search radius. For those willing to make the trek out of their area, the right vehicle could be waiting for you.
Inflation will hit your wallet
It’s no secret that inflation is hitting consumers hard.
The Consumer Price Index, a measure of inflation that considers the cost of consumer goods over time, found that prices have risen by 8.5% since March 2021. That’s a big hit to anyone’s budget!
Essentially, inflation forces you to spend more on the same goods. If your budget gets pinched too hard, it can suddenly be difficult to make ends meet.
For example, you might struggle to make your monthly car payment due to the rising cost of goods. After all, you’ll still need to buy food, gas, and more regardless of the price tag.
If you already have a car payment, auto loan interest rates can still be important. With attractive interest rates, you could tap into savings through a refinance.
So, if you are struggling to make your loan payments in the midst of historic inflation, it’s important to check out your auto refinancing options. Since auto loan interest rates are relatively low and used car prices are at a high point, it’s the perfect storm for a refinance that lowers your monthly payment.
How Can I Get a Lower Auto Loan Interest Rate?
With the Federal Reserve on a path to raising interest rates, one way to get a lower auto loan rate is to shop around for a refinance now.
Depending on factors like your credit score and history, you could find a lender willing to offer a lower car loan rate that equates to hundreds in annual savings. Whether you have bad credit or excellent credit, seriously consider tapping into low rates before the Fed makes any more rate hikes.