The Fed rate is not your car-loan rate
If you're shopping for a vehicle, there's an obvious question: Does that mean car loans just got more expensive? Possibly—but not in the simple way some headlines make it sound.
The federal-funds rate and the APR somebody offers you on a vehicle are two different numbers. When the Fed changes its benchmark rate, it can influence borrowing costs throughout the financial system. Auto lenders may eventually adjust their rates as their own costs and market conditions change.
But a quarter-point Fed increase does not mean every dealership, bank or credit union automatically adds exactly 0.25% to every auto loan today. Your actual rate can depend on your credit profile, lender, loan term, amount financed, vehicle age, down payment and other underwriting factors.
How much does a small rate difference actually matter?
Suppose you're financing $30,000 for 60 months. The difference between two relatively close interest rates may not completely change whether a vehicle fits your budget—but it still changes the total amount you'll pay.
That's why I like comparing the whole deal instead of asking only, "What's my payment?" Look at the vehicle price, trade value, amount financed, interest rate, term, monthly payment and total borrowing cost.
A lower monthly payment created by stretching the loan farther isn't automatically the cheaper option.
- Vehicle price
- Trade value
- Amount financed
- Interest rate
- Term
- Monthly payment
- Total borrowing cost
Should you rush out and buy before rates go higher?
I wouldn't. Nobody knows exactly what your individual loan offer will look like next week or several months from now, and buying a vehicle you don't need because of one Federal Reserve announcement usually isn't a great starting point.
If you already need a vehicle, however, this is a good reason to understand your financing options before you fall in love with a specific truck or SUV. Knowing roughly where your payment and approval situation stand can make the vehicle search much easier.
What about credit unions?
Don't assume there's one universally cheapest place to finance. A credit union may have a strong rate. So might a bank. Manufacturer financing can sometimes be competitive on qualifying new vehicles, and dealership-arranged financing can provide access to multiple lenders.
The useful comparison is the actual offer available to you, including the APR, term and any incentives connected to the financing choice. That's especially important with new vehicles because sometimes a promotional financing offer and a cash incentive aren't available together. Compare the complete numbers before deciding which one is better.
Your trade still matters
Interest rates get the headline, but your trade position can have an even bigger effect on what you're financing.
If your trade is worth considerably more than what you owe, that equity can reduce the amount you need to finance. If you owe more than the vehicle is worth, rolling negative equity into another loan can increase both the balance and payment.
So before deciding whether today's interest-rate environment is good or bad, figure out where your current vehicle fits into the equation.
What I'd do if I were shopping around Mid-Michigan
Start with your real budget. Then compare the vehicles that fit it.
If you're around Clare, Mount Pleasant, CMU, Midland or elsewhere in Mid-Michigan and financing is the part you're unsure about, SmartCarMatch has a separate Financing Help path specifically so you don't have to fill out a full credit application just to start asking questions.
You can start with your first name, one way to reach you and whether you're thinking about payment, financing, a trade or a specific vehicle. Then we can figure out the next step from there.
A Federal Reserve announcement matters. It just shouldn't make the vehicle decision for you.
— Kahleel Rider, SmartCarMatch