The Federal Reserve’s recent 50-basis-point rate cut may raise hopes for cheaper auto loans, but industry experts caution that the impact on car affordability will be minimal in the short term, FOX Business reports.
Bank of America analysts suggest that while lower rates could eventually bring relief, it will take a series of cuts before consumers see significant improvements in borrowing costs.
Since the Fed began its aggressive interest rate hikes to combat inflation in early 2022, the average 60-month new vehicle loan rate has surged to 7.8%, its highest level since 2001. This is well above the 20-year average of 5.4%, making car affordability a challenge for many Americans. The Bank of America report highlights that it may take until 2025 or later before rate cuts meaningfully lower auto loan rates for consumers.
Analysts estimate that for every 100-basis-point reduction in rates, car payments could drop by roughly $20 a month. However, with the average new vehicle loan payment now at $967, a 12.5% increase from last year, the current cut is unlikely to provide immediate relief.
The Fed’s rate is currently between 4.75% and 5%, with Bank of America predicting gradual 25-basis-point cuts each quarter, potentially bringing rates down to 3.25%-3.50% by 2026. Despite the recent cut, consumers should brace for higher-than-expected interest rates on both new and used vehicles in the near term. Additionally, rising costs of auto insurance and vehicle maintenance will further strain car affordability for many buyers.
