The Federal Reserve May Lower Interest Rates, Which Is Good News for Your Auto Loans

Jerome Powell, Chairman of the Federal Reserve, said earlier today that inflation is about to come down at reasonable levels—levels that would allow the Reserve to begin lower the interest rates it sets for overnight loans between banks. This change may have an effect everything from mortgages to credit cardsbut How will this impact your next car loan??

Well, for potential buyers, you’re in luck: a Fed interest rate cut should means a discount on your next car loan. Your auto interest rates are based on a myriad of criteriafrom your credit score and history to your down payment, but lenders factor in Fed interest rates into your calculations indirectly.

The rates set by the Fed are not hard and fast laws; they are targets and ranges. These target ranges apply to overnight lending between banks, which lend each other money on a day-to-day basis to settle accounts and ensure that they have enough reserves in the Federal Reserve to cover their customersThese rates, applied between banks, form the basis of a bank’s monetary policy. preferential ratethe amount he charges his best, most favorite customers, like companiesThis prime rate then becomes the benchmark for the rest of that bank’s loans, including — you guessed it — car loans.

Interest rates on cars may well be lower than a bank’s prime rate. Bank of America, right now, offers rates as low as 5.79% on new car purchaseswell below that of the bank preferential rate of 8.5 percent. Nevertheless, the prime rate is a major factor in pricing these auto loan options, even if the resulting decision involves reducing the base rate.

When the Fed’s benchmark interest rate goes down, overnight lending rates go down. When overnight lending rates go down, so do the prime rates that banks charge their customers. When that benchmark goes down, so do the rates offered on auto loans. It’s a Rube Goldberg economics machine, with far more complicated math than most people realize, but ultimately, lower Fed rates are good for you and your next car purchase.