Chairman Powell says the U.S. economy may be on a “stronger trajectory than expected”
Although the U.S. labor market remains depressed through September with few jobs and layoffs, the overall economy “may be on a somewhat stronger trajectory than expected,” Federal Reserve Chairman Jerome Powell said Tuesday.
- The Fed’s recent 0.25% interest rate cut could make it cheaper for consumers to take out large loans.
- A lower interest rate will reduce your total payments over the life of your car loan, potentially saving you hundreds of dollars.
- Experts have suggested that used-car loans could be more directly affected by the Fed’s interest rate cuts than new-car loans, which are often already subsidized by automakers.
The Federal Reserve made a long-awaited rate cut in September, lowering interest rates for the first time in almost a year.
A 0.25% interest rate cut could put consumers in the position of taking out larger loans to purchase things like homes and cars.
“Lower interest rates are a great thing,” Jessica Caldwell, director of insights at online car information site Edmunds, told the Courier Journal, a member of the USA TODAY Network. “Most people have some funding set aside for their car, so this really makes a big difference.”
As of Oct. 7, 73- to 84-month auto loan interest rates for new vehicles are as low as 6.49% annualized for borrowers with “excellent” credit histories, according to Navy Federal Credit Union. Meanwhile, Navy Federal Credit Union reported that its auto loan interest rate was as low as 6.69% before the rate cut. The annual percentage rate (APR) is the total cost of your car loan expressed as a percentage and includes interest rates and fees to give you a clear picture of your total borrowing costs.
Caldwell said that for most car buyers, the average term of a car loan is 70 months, and the average loan amount is nearly $43,000.
Caldwell said the average monthly payment for a new car is currently $761 and the average monthly payment for a used car is $570. But back in 2019, before global tensions between trade, parts shortages and the coronavirus pandemic, the average monthly payment for a new car was $559.
“People are almost in sticker shock,” Caldwell said of the drastic change in car prices in just six years.
Shoppers can use online tools like the Edmunds Car Loan Interest Calculator to see how much interest they’re “actually paying on their auto loan.”
For example, if you finance $40,000 for 72 months at an annual interest rate of 6.49%, you’ll pay $8,402 in total interest. If you finance $40,000 for 72 months at an annual interest rate of 6.69%, you’ll pay $8,674 in total interest.
And for those considering refinancing their current loans, Caldwell said it’s still important to consider how much money is left on your current loan, even though lower interest rates may provide some financial relief.
“If you sign up for a new loan, are you signing up for another five years? That’s not ideal,” Caldwell said. “Ultimately it depends on the person’s situation, and if you’re paying a high interest rate and it’s going to take about two years, it might be better to just keep using it.”
As car buyers explore the best time to buy and what the latest Fed rate cuts mean for car prices, USA TODAY Network spoke with Caldwell to discuss what people should consider when buying a car.
Note: This interview has been lightly edited for clarity and brevity.
Have interest rates fallen enough to affect your car loan?
caldwell: “Two things happen with auto loans. For new cars, many automakers offer some sort of subsidized interest rate as a form of incentive to get people to buy the car. When the Fed lowers interest rates, a lot of the time…those rates don’t necessarily show up in the data because[the automakers]are already subsidizing those rates.”
“On the used car side…with the exception of certified used cars, there’s probably going to be a little more influence on what the Fed does with used cars. Used cars are going to see a lot more reaction to what the Fed does than on the new car side.”
Which types of new, used, or certified pre-owned buyers will benefit most from interest rate reductions and why?
caldwell: “Eventually it’s going to happen to everyone. Even on the new car side, if automakers decide it’s cheaper to borrow money, they can offer more generous incentives to their customers. On the used car side… they’re often heavily influenced by what’s happening on the Fed side. This really benefits everyone who is borrowing money, the vast majority of Americans.”
How does loan interest rate affect EV?
Caldwell said leasing these vehicles could impact APRs for shoppers who may be interested in electric vehicles, especially given the EV tax credit disappears. Caldwell said most people who buy an EV tend to lease it, and more than 70% of new cars purchased at dealerships are leased.
“EVs are a different beast in some ways, and I think that’s why more and more people are choosing to lease rather than buy an EV,” Caldwell said. “Things may change because buyer behavior may be different now that the federal tax credit has been eliminated. But it’s only been a few days since that happened, so it’s hard to say.”
How will lower interest rates affect lease agreements?
Caldwell: “If you can lower the money factor, your monthly payments will be lower. But if you look at the industry as a whole, across all new cars sold, lease rates are around 20%, so about one in five people are affected. If you lower the interest rate, you lower the money factor, which essentially means lower monthly payments. That’s what everyone really wants.”
What should car buyers consider in light of lower interest rates?
Caldwell: “Credit scores are probably very important. … It’s really important, because if you’re in a certain credit range … especially if you’re financing for 72 months, it can make a big difference. … And I think people really need to reevaluate what their driving habits are, because sometimes people … want something new.
“I think the other thing is that the market is in such turmoil between COVID-19 and the semiconductor shortage and even tariffs. I think it’s a better idea to really consider (and ask) what kind of car you can buy. Is newer a better idea? Or is it certified pre-owned? Considering the total package of price, interest rate, and how long you’ll own this car, I think that’s probably what’s important to you.” ”
Contact business reporter Olivia Evans at oevans@courier-journal.com or @oliviamevans_ on X (formerly Twitter)..
