What a Fed Rate Increase Means for Your Auto Loan

Generally, when the U.S. Federal Reserve raises interest rates it means that borrowing money will become more expensive.

What a Fed Rate Increase Means for Your Auto Loan

If you’re looking at buying a car soon you may be closely watching the expected Fed rate increase due to be just announced on Wednesday. Generally, when the U.S. Federal Reserve raises interest rates it means that borrowing money will become more expensive. We here at Instamotor recently crunched some numbers to get a better idea of what is going on in the world of borrowing and what it could mean for you as you look to purchase a new-to-you car.

All About the Fed

The U.S. Federal Reserve essentially controls the flow of money into the economy by pulling various levers. Known as “The Fed,” or the “Central Bank,” it is made up of 12 separate district banks, and 25 regional branches that are spread out across the country. The Fed was created by Congress in 1913 and is run by a board of governors who make the monetary policy for the country.

Those on the Board of Governors are nominated by the President and serve 14-year terms. While the Fed is an independent entity, it is still overseen by Congress. The board is led by a Chairman and Vice Chairman, who are appointed by the President and then approved by the Senate. They each serve 4-year terms. The Fed plays the role of banker, regulator, controller and watchdog of the U.S. economy, all in one.

The Fed holds meetings called Federal Open Market Committee (or FOMC for short) meetings about every six weeks to check on the state of the economy and issue a risk statement. These statements tend to have an effect on the stock and bond markets and they are generally considered to be the major indicators of what the market can expect in terms of rate changes. Recently, the Fed has said that it thinks that the labor market has continued to be in good shape, while inflation is beginning to creep up. Inflation is one of the main concerns of the Fed. If you want to get really wonky, you can read the Fed’s statement from the November meeting, here.

The Fed has a number of levers it can pull to adjust the flow of money into the market and one of the main ways that it does this is to change interest rates. Because the Fed believes that inflation is on the upswing, many economists believe that they will raise interest rates at the meeting next week.

That means that the current interest rates that you see at your bank or private lender, will likely increase after the Fed sets the rates slightly higher next week. But what else is going on in the market?

Other Economic Factors

There are plenty of other factors that the Fed considers including things like household spending and debt. One of the factors that we here at Instamotor took a closer look at was the data as it related to auto loans.

According to our analysis, the average auto loan amount has increased over the past few years. In 2004 for example, the average loan amount per indebted household was $21,209. In 2015 it climbed by more than $6,000 to $27,865.

Along with this the debt-to-income ratio for auto loans has increased, according to our research. In 2004 the debt-to-income ratio for auto loans was 47.84%. In 2015 it increased by nearly 1.5%.

We here at Instamotor also discovered that the amount of interest that American households pay has increased. Assuming a 48-month loan, the amount of interest an average household paid was around $451 per year in 2004. By 2015 that number increased to $457 per year.

When you take into consideration that the Fed has not really changed rates since 2008, it can be a bit worrisome to think that they could increase rates. Fear not though, the expected increase is only around a quarter point and according to a story over at CNBC, and the Chief Financial Analyst at Bankrate, an increase that small isn’t likely to “be something you necessarily notice.”

So How Will The Rate Increase Affect Your Auto Loan?

Since the expected hike should be relatively low, you likely wont notice a huge jump in rates for your auto loan. As Greg McBride from Bankrate said in his interview with CNBC, “Nobody is going to have to downsize from the SUV to a compact car because of rates going up.”

That’s largely true since, according to the story, the cost of a quarter point increase in rates on a $25,000 loan is just $3.

What Should You Do

So if you are in the market for a car, what’s the best angle of attack to ensure that you get a great rate?

First check your credit and see where you stand. Once you know what your credit rating is you will be better armed to know what to expect when you head to a bank or a private lender for a loan. You should always take this into consideration when you are setting a budget for your used car. If you want a deeper dive on how to understand your credit rating and how it impacts your loan, check out our post and use our Auto Loan Calculator to get an estimate.

Next, ensure that you have done all you can to clean up your credit. This may include things like pulling your report to see that there aren’t any errors or problems that are negatively impacting it.

You also should negotiate the price of the vehicle before you head off to the bank to sign off on a loan. Get the price as low as possible and your payments will be lower since you wont have to take out nearly as much money. It also can help to put more cash down up front to reduce the amount of money you need to take out for the loan.

Finally be sure to shop around, too. Some credit unions and smaller banks offer better rates than big, national banks. Do your research before hand to know what you can expect when you put an application in—and be aware that they will run your credit, too, which can negatively impact your rating. Also know that the rate a bank advertises isn’t necessarily the rate that you will walk out with. The advertised rates are generally reserved for those with incredibly good credit ratings.

All-in-all its best to do your homework and negotiate a great price on your used car.

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Abigail BassettAbigail Bassett

Digital media content producer/consultant & former CNN senior producer, now running CN'TRL : Cars, Tech, Real Estate & Luxury.