Will the Federal Reserve’s Interest Rate Hike Affect Car Loans?
2015 has been a very good year for the auto industry for the most part (unless you’re Volkswagen). In the United States, there were over 17 million auto sales last year, which is the highest on record since the Great Depression. One of the main reasons for this increase in sales, according to many industry analysts, is that car loans are being offered at very low rates. Car loans today can range from 0%, if there’s manufacturers’ incentives involved, to 3% for a five-year loan.
However, recently on December 16, 2015, the Fed boosted interest rates by a quarter of a percentage point. And this year, in 2016, they are planning to raise rates by an additional 1 percentage point in small increments. So what does this mean for car loans moving forward? Not much, at least initially:
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Other Factors May Influence Buyers More
While auto loan rates are one of the influencing factors in people deciding whether or not to purchase a vehicle, there also other factors that are actually more important. According to many economists, currently, it is the improvements in the economy, the recovering job market, and the low cost of gasoline that are exerting more influence. Plus, many consumers simply have to replace their vehicles due to age. That’s because, as IHS Automotive has discovered, cars that are used in the United States are, on average, 11 1/2 years old, which is a record.
Further Interest Rate Hikes Won’t Have a Large Impact
By the end of 2016, if interest rates do, in fact, rise by an additional 1 percentage point, the interest rates on car loans will not immediately go up in most cases. Instead, they’ll eventually go up after around 6 months from the day of the Fed’s announcement, meaning that it’ll be sometime in 2017. Some economists have stated that this will lead to a 1% decrease in auto sales within a year and a 2% decrease in sales within two years.
Consumers may simply decide to buy a lower priced vehicle as a result, but sales themselves are not expected to go down by much. If other aspects of the economy suddenly start deteriorating and the price of gasoline goes up suddenly, this will have a bigger impact on future auto sales.
Take Advantage of Low Interest Rates…But Exercise Good Judgment
Whether car loan rates stay low or not, the most important thing that you can do is to make sure that you’re buying a car that you can afford. No matter if the rates are high or low, you should always exercise sound financial judgment by only purchasing a vehicle if the financial situation in your life is healthy enough to afford it. Otherwise, you could be setting yourself up for financial ruin, including destroying your credit score.
So, for the foreseeable future, the Fed’s interest rate hike won’t have any real impact on car loans. Moving further into 2016, if the Fed continues to raise rates as they are expected to do, it won’t be until 2017 when we really start to feel it.