How the Fed's rate cut will impact auto loans

Americans looking to buy a vehicle in the near future might feel hope that the Federal Reserve’s 50-basis-point federal funds rate cut on Wednesday might bring down the interest rate on their next auto loan, but Bank of America analysts say there will not be much of an impact on borrowing costs in the near future.

Ahead of the central bank’s announcement, Bank of America Securities released an auto industry overview saying that relief may be around the corner, but it will take a series of cuts before consumers see any material improvement in affordability.

The report said rising interest rates from the Fed’s aggressive campaign to fight inflation in recent years has made affordability a key issue, noting that since the central bank launched its rate-hike campaign in early 2022, the national average 60-month new vehicle loan rate has climbed roughly 430 bps to 7.8% as of the end of last month. 

That is the highest level since 2001, the analysts noted, and above the average over the last 20-plus years of around 5.4%.

FEDERAL RESERVE CUTS INTEREST RATES BY HALF-POINT; FIRST RATE REDUCTION IN FOUR YEARS

BofA had predicted a 25pb cut this week, but acknowledged some economists expected the 50bp cut that materialized. “Regardless of the magnitude, we highlight that the transmission of a lower fed fund rates to auto loan rates at the consumer level is slightly delayed,” the analysts wrote, adding, “consumers would likely start to reap the benefits from rate cuts in 2025+.”

But it will take a lot more than the single rate cut from the Fed to make a notable difference in auto loan rates. Since 2022, the higher rates have pushed the average new vehicle loan payment up $108 a month to $967, a 12.5% increase, the analysts found.

The analysts estimate that for every 100bps rate cut, the average car payment will come down about $20.

FED INTEREST RATE CUTS WON’T HELP YOUR CREDIT CARD DEBT

BofA said its Global Economics team expects 25bp rate cuts by the Fed every quarter after Wednesday’s cut, with the terminal rate landing in the 3.25%-3.50% range sometime in 2026. The rate is currently at a range of 4.75% to 5%.

In the meantime, a recent report from auto shopping guide Edmunds found prospective car buyers can expect an unpleasant surprise in financing for their next ride.

The study found three out of four used car shoppers are currently targeting an interest rate between 0% and 5%, but six out of 10 car buyers who financed a used vehicle purchase in July ended up with an interest rate between 6% and 11%.

GET FOX BUSINESS ON THE GO BY CLICKING HERE

Edmunds also found that both new and used vehicle prices on the lot today are priced higher than buyers plan on spending.

Car affordability as a whole is not expected to improve anytime soon, either, as auto insurance and maintenance costs continue to soar.