What Do Interest Rates Mean For Car Buyers?

March 18, 2022

The Federal Reserve just increased interest rates for the first time in three years, and projects six more rate hikes coming. Following the ups and downs of the past two years, automakers, dealers and buyers have seen it all. Low demand in 2020, not enough cars to sell in 2022, and wild swings in pricing. What about the consumer perspective? Things are changing quickly, and it can be hard to keep track. What do interest rate hikes mean for car buyers in 2022? We spoke with CarEdge car buying expert Mario Rodriguez to find out.

How will higher interest rates impact new car buyers? 

2022 Tesla Model 3
2022 Tesla Model 3

There are very few automaker or dealer incentives right now. The sellers have the upper hand in today’s market. They’ve raised MSRPs, and additional dealer markups have piled on. Selling new cars, dealers can toy with the profit equation. Both front-end and back-end profit scenarios are on the table for a dealer. 

Either they could increase the car’s price and drop interest rates via captive lending, or take the opposite approach and keep car prices the same but raise interest rates for buyers. When it comes to interest rates, however, NEW car buyers probably won’t see much of a change, at least after this first Fed rate hike. 

Automakers can afford to subsidize the small rate increases because of captive lenders, not to mention the record profits they make per vehicle sold right now. There’s been a lot of inflation, but not to the magnitude of the MSRP hikes we’ve seen.

What is a good interest rate for a new car?

Things are changing day to day, but in spring of 2022, attractive financing rates for new cars range from 0.9% to 1.9%. Gone are the days of 0% financing, for the most part. As of early 2022, Hyundai has 0% financing for 48 months. Keep an eye out for anything below 2% for new car buyers with good credit.

How will higher interest rates impact used car buyers?

dealership

This is where buyers will feel the pinch. Used cars sell for less (on average), and a lot more math is involved with profit margins for dealers. Private party lenders are quicker to reflect baseline rate hikes. It might take a few months for new car loan rates to rise noticeably, however used car loan rates will rise immediately.

What is a good interest rate for a used car?

Through a credit union, you can finance a 2015-2020 model for 3.50% for 60 months. Remember, car buying interest rates depend heavily on credit scores, so your rate may be higher if you’re still building up your credit score. 

It’s important to bear in mind that a higher interest rate will cost buyers who demand an expensive vehicle more than if a cheaper vehicle was to be purchased. A 6% interest rate will result in about $6,000 in total interest paid for a $40,000 loan over 60 months, but just $2,400 for a $15,000 loan over the same term.

Will there be more interest rate hikes?

Certainly. The US Federal Reserve plans at least 6 more interest rate hikes in the next several months. Why is the Fed hiking interest rates? It’s a tool used to combat inflation. When money gets too ‘cheap’ to borrow, money loses value and inflation ensues. Consider that right now, even with the rate hike, the federal base interest rate is 0.25%-0.5%. Pre-pandemic, the Fed had interest rates at 1.55%. Sooner or later, rates will climb back to pre-pandemic levels.

Will buying a car get more expensive? 

Buying cars will likely get more expensive in the spring of 2022. The spring car buying season is always a period of high demand, and inventory is slim to none. The ongoing chip shortage, war in Ukraine, and recent earthquake in Japan are just some of the greatest factors driving car prices up, and lot inventory down. Consequently, used car prices remain high as car buyers are cornered into what little supply exists.

Check back to CarEdge for the latest auto industry and car buying updates. 2022 is just getting started, and interest rates are sure to bring even more changes to the consumer experience. 

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