Last month, the Fed cut interest rates for the first time in over 10 years. This move was in stark contrast to the federal funds rate trend over the last 3 years where rates were increased 9 times. This time, the rates were cut by 25 basis points which translates to a range between 2% and 2.25%. While some are speculating that this move is an indicator of an upcoming recession (the last rate cut happened in 2008 as the country was moving towards the great recession) we'll take a look at a more immediate implication - how this cut affects you as a car shopper.
Impact on your Car Loan
The actual impact of the interest rate cut on your auto loan will likely not be very significant. According to Bankrate, a quarter-point difference on a $25,000 loan is $3 a month. Sure, the savings may pay for one coffee, but it's not something you'll be writing home about. Despite the steady rise in interest rates in the last few years, the average car loan rates remain relatively low with an average rate of 4.21% for 2019. Although it may not be earth-shattering when it comes to your car loan, any time there is a Fed rate cut, it benefits borrowers (mortgage, credit cards, auto loans, etc.) while hurting savers.
Impact on Your Negotiating Power
An additional way to leverage the rate cut is to negotiate more aggressively with the dealer on the price of the car. Remember that manufacturers and dealers benefit from lower financing costs due to the rate cuts too, but on a larger scale. Instead of financing just one car like you're doing, they deal with thousands of vehicles. This means you can try to get a better deal on the car's price. For your best chance at getting the price you want, follow our top tips for negotiating on a car:
- Bring your pre-approved financing in.
- Show them that you've done your homework.
- Always be friendly and don't act like a jerk. You'll get pushback since no one wants to help an impolite customer no matter how much they need the sale.
- Know what price you're willing to stay for and what you'll walk out for without buying the car.
- Rarely, will the price reduction be drastic unless you're purchasing a vehicle that has low demand. After all, most online ads will factor this in, anyway.
- Know what the various categories when it comes to final pricing at the Finance & Insurance department. Realize that there are other costs related to the out-the-door price, depending on your state, even if you don't purchase anything additional like extended warranties or window VIN etching.
How to Get the Lowest Possible Car Loan Rate
To answer our initial question (does the Fed's rate cut mean now is the best time to buy a car?), we'd say that while it shouldn't be your sole reason to run out and buy a car, it surely won't hurt to save a few bucks. If you were hoping for a more substantial impact on your auto loan rate from the Fed's rate cuts, don't be discouraged. There are other ways you can set yourself up for success before buying and financing your car. In fact, putting in the time to plan and finance your car wisely can pay off much more than the Fed's cuts.
To get your lowest possible car loan interest rate, consider all the additional factors that play into your rate. These include your credit score, your lender options, and your loan terms. To get your lowest possible interest rate and potentially save thousands of dollars over the course of the loan, the first step is understanding your credit score. Before applying for a loan, you need to be aware of your current score and the credit range it puts you in. If your credit falls in the "fair" or "poor" category, your best course of action is to find a co-signer or hold off on the car purchase until you can improve your credit score.
Keeping your car loan terms short will also help you avoid overpaying on interest. Long-term loans are becoming more common but they come with much higher interest rates. Sticking with loan terms of 60 months or less will give you the best chance at a good interest rate. Finally, comparison shopping for your interest rate can offer more significant savings than the Fed's rate cuts. It's worth taking a few minutes to apply for pre-approval for a car loan via a bank, credit union or online financing company. This allows you to compare offers side-by-side and select the lowest interest rates and the best terms.