On July 31, 2019, the Federal Reserve made the decision to cut interest rates by 0.25%. This move will mostly benefit homeowners and new home buyers , but how does it affect consumer auto loans?
The current interest rate movements in the market have an impact on almost everything in the marketplace. Borrowing costs change, deposit rates can change, and companies can shift their current cash flow activities. Consumers will notice the changes relatively quickly through lower interest rates on both borrowings and deposit products.
Mortgages are one of the most common products people think of when rates move because the 30-year fixed is arguably the most popular product tied to the Fed’s interest rate activities. However, a rate that you may not pay attention to are the auto loan rates, which for many financial institutions are a large portion of their overall portfolio. One of the main differences you’ll notice right out of the gate are auto loan rates do not move in lockstep with the Fed Funds Rate.
With a mortgage, you can see an almost instant pricing change, but with auto loans they may move minimally or not at all. A main reason for this type of pricing are auto rates tend to be less expensive to begin with.
Auto loans are a common and frequent loan type, making the market extremely competitive. If you have solid credit you can easily find rates that are lower than 3% and depending on the dealership you can potentially find a 0% interest rate. With that in mind, it can be difficult to reprice auto rates in step with the Fed’s interest rate. Now, some of the benefits you can look forward to with lower interest rates are just that, a lower interest rate. The cost of borrowing is going to be less, meaning your dollar will go further. The main places you can look for an auto loan include the dealership, a bank or a credit union.
Typically, you will find a lower interest rate at a credit union and this is because they are a non-profit and their interest lie in returning value to their depositors. From there you can go to a traditional bank and lastly going through the dealership.
Another benefit includes the ability to refinance your auto loan if you were unable to secure a competitive rate. One of the main differences between auto loans and mortgages are the length of the note. Auto loans are typically 7 years or less, meaning the interest rate must move a bit more to make an impact. For example, if your auto loan is currently at a 7% and you can refinance into a 4%, that is certainly worth exploring. Keep in mind though you don’t want to re-extend the length back out to longer than your current note because you may not save as much or any money at all.
The final impact that can dictate your interest rate is your credit score. Unlike a mortgage, auto loans tend to price according to your credit score more closely. An interest rate attached to your note is how the lender measures risk.
Now, this trickles into your note because as rates become lower, businesses can borrow at a lower rate and potentially take on a bit more risk. This means if you were priced with a 650-credit score at 7%, you may be able to shop and get a rate closer to 6%. While this is a bit more intricate, it is worth noting during your research process. Rates seem as if they may continue lower, but speculation is something to exclude from your decision-making process.
Right now, rates were lowered in July and that means borrowing will be less expensive. While you are looking for an auto loan you may not see rates falling immediately, but as rates may fall eventually you will see that reflected in the auto loan market. Increase your odds of benefiting by shopping in the right places and visit a few financial institutions. Start with credit unions and use the dealership financing as a last resort. If you get a less competitive rate, look to refinance when possible and save yourself interest expense. Keeping an eye on the interest rate environment is not only good knowledge but it can have a direct impact on your wallet.