The Federal Reserve’s decision to slash rates this week will have an impact on one of the biggest financed purchases Americans make — automobiles.
The Federal Reserve cut its benchmark funds rate by a larger-than-expected half percentage point, or 50 basis points, resulting in a target range of 4.75% to 5%. The Fed’s interest rate decisions filter through the economy, affecting virtually every facet of borrowing costs and saving rates, including interest rates on short-term loans, which are generally used to finance vehicle purchases.
Last month automotive research site Edmunds polled car shoppers who have purchased a vehicle previously and are likely to buy a car in the next 12 months whether an interest rate cut would affect their purchase decision. Edmunds’s polling revealed a majority of car shoppers — 62% — are holding off on purchasing their next vehicle because of high interest rates.
The Fed’s move to cut its benchmark rate by a half percent may move these shoppers off the sidelines.
“Many Americans have been holding off on making vehicle purchases in the hopes that prices and interest rates would come down, or that incentives would make a return,” said Jessica Caldwell, Edmunds’ head of insights. “A Fed rate cut wouldn’t necessarily drive all those consumers back into showrooms right away, but it would certainly help nudge holdout car buyers back into more of a spending mood.”
The effect of high rates is even more pronounced on younger car shoppers. Edmunds found that 72% of car shoppers under the age of 44 said a Fed cut would affect their car purchase timing, compared to 57% of buyers 45 and older.
Even the types of cars are affected. Nearly three-quarters (74%) of likely electric vehicle purchasers said a rate cut would affect their purchase timing, compared to 57% of non-EV car shoppers.
Read more: Is it better to lease or finance a car? Here’s how to decide.
Luckily for most EV buyers, those prices have come down steadily as Tesla and others have conducted price wars here and abroad. And overall car prices slipped — among the most of any major category in the Consumer Price Index (CPI) over the last year — as vehicle prices moved toward pre-pandemic levels.
The drop in retail prices paid for cars, combined with the prospect of falling finance rates, will only help consumers affected by pandemic-fueled inflation and finance costs.
And the effect of rate cuts can be substantial. Bank of America Securities found that consumers will see some relief in monthly payments, with each 100 basis point decrease equating to a ~$20 decrease in an average monthly payment for a new vehicle. While that doesn’t sound like much, with nearly two-thirds of Americans living paycheck-to-paycheck, they will take all the relief they can get.
BofA economists found that the increase in auto loan rates beginning in 2022, when the Fed started hiking rates, coupled with high prices from the pandemic created an “acute affordability issue.”
It seems the Fed’s path to lower rates could ease affordability issues and give Americans much-needed financial relief with their next car purchase.
Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.
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