The Federal Reserve recently convened and announced, to the surprise of many, that it would not raise interest rates. There’s a lot of relief among financial analysts and stockbrokers, but what does that mean to you, the auto loan shopper? Let’s take a look at why the Federal Reserve is important and how it affects auto loans
Let’s start with what the Federal Reserve can and cannot do. There’s a lot of talk about how it can change interest rates and the economy, but the Federal Reserve really only has one tool at its disposal to affect the economy, the federal funds rate.
The Federal Reserve is essentially a bank that other banks use to loan each other money; if you’re a bank with a surplus, and a bank that needs money wants to borrow that, they go through the Federal Reserve. This is both to insure the money and to limit how much hard currency is exchanged directly between banks. The federal funds rate is something of a brake or throttle for the economy; if the Fed feels the economy is growing too fast and might collapse without being reeled in, it will raise the rate. It’s also usually reflected in the “prime rate,” which is the general interest rate most banks start with when calculating their interest rates.
Like any bank, the Federal Reserve charges an interest rate to use its facilities: The federal funds rate. The Federal Reserve sets a “target rate” it’d like to meet, and that more or less sets the cost of doing business if you handle money on a professional scale. As a result, whenever the federal funds rate starts changing, the supply of money changes, getting more abundant or less depending on how much banks have to pay to use the reserve.
So the Federal Reserve doesn’t directly change interest rates, but it can raise and lower the cost of doing business. As a result, if the federal funds rate changes, banks have to pay more or less and will pass that cost onto the consumer, across all financial products … including auto loans.
As a result, that the Federal Reserve didn’t raise rates is good news for auto buyers currently looking for loans. But it also means that the rates you get now aren’t going to last forever.
It’s widely believed that it’s only a matter of time before the Federal Reserve decides to raise the federal funds rate. There’s a number of reasons behind this, but the ultimate effect will be the same; it’s going to become more expensive to get an auto loan over the life of that loan.
So, if you’re looking to buy a car, now is the time to do. Simply put, due to how monetary policy operates, you’re unlikely to get a better deal soon. Even just a modest increase in interest rates might cost you hundreds or even thousands more over the life of your loan, so don’t wait for the government to make a decision: Get your car now.