Jerome Powell, chairman of the Federal Reserve, said earlier today that thing Inflation is on the decline again at a reasonable level — the level at which Reserves begin lower the interest rate it sets on overnight lending between banks. Such change may affect everything from mortgages to credit cardsBut How will it affect your next auto loan??
Well, for potential buyers, you’re in luck: The federal funds rate is down. should means lowering your next auto loan. Your auto interest rate is based on a myriad of criteriafrom your credit score and credit history to your initial payment, but lenders factor the Fed’s interest rate into their calculations indirectly
The interest rates set by the Fed are not hard and fast rules, they are targets and ranges. Those target ranges apply to overnight loans between banks, which lend money to each other overnight to settle accounts and make sure they have enough money in the federal reserve to pay their customers. Those interest rates, charged between banks, form the basis for a bank’s base ratethe amount it charges its most favored customers, like corporationsThat base rate then becomes the benchmark for the rest of that bank’s loans, including — you guessed it — auto loans.
Auto interest rates can be lower than bank prime rates. Bank of America, right now, offers interest rates as low as 5.79 percent on new car purchasesmuch lower than the bank base interest rate 8.5 percentHowever, the prime rate remains the primary determinant of auto loan pricing, even if the decision means lowering the prime rate.
When the Fed’s interest rate guidance falls, so do overnight lending rates. When the guidance falls, so does the prime rate that banks charge their customers. When that prime rate falls, so do auto loan interest rates. It’s a Rube Goldberg economic machine, with math far more complicated than most people ever consider, but ultimately a lower federal funds rate is good for you and your next car purchase.
