How to Save on Auto Loans as the Federal Funds Rate Changes

Auto loan costs are tied to the federal funds rate, which is set by the Federal Open Market Committee (FOMC).

This rate influences the interest rates lenders charge for car loans, meaning that whenever the Fed raises or lowers its rate, borrowing costs for vehicles adjust as well.
 

Changes to the Fed's Benchmark Rate

Between 2022 and 2023, the Federal Reserve raised its benchmark rate several times in an effort to lower inflation.

However, after implementing a series of rate cuts, the Fed held rates steady during its June 2025 meeting. Despite the pause in rate changes, borrowers may need to wait for additional cuts before noticing substantial decreases in auto loan rates.

For the past two years, auto loan costs have been high, largely due to the Fed’s strategy of combating inflation through interest rate hikes. These efforts have shown progress, with inflation dropping to 2.4 percent in June 2025—close to the Fed’s long-term goal of 2 percent.

Fed Chair Jerome Powell has indicated the potential for two further rate cuts before the end of 2025, but meaningful reductions in auto loan costs may take time to arrive.
 

How You Can Save Money Regardless of Rate Changes

While financing a vehicle becomes more expensive during periods of high interest rates, there are strategies you can follow to minimize your costs:

1. Apply for Auto Loan Preapproval

Getting preapproved for an auto loan allows you to lock in an interest rate and calculate your monthly payments before finalizing the purchase. Preapproval not only gives you clarity about costs, but it can also improve your negotiating power when working with dealerships.

2. Consider Trading in Your Current Vehicle

If you already own a car, trading it in can reduce the upfront costs of your new vehicle purchase. This approach helps you save on your down payment and eliminates the hassle of selling your car privately.

3. Shop Around for Loan Offers

Experts recommend comparing at least three loan options before deciding on financing. Dealer-offered loans are often more expensive than those available from banks or credit unions, so make sure to review alternatives to find the best rate.

4. Focus on What You Can Afford

Before committing to a loan, take the time to calculate whether the monthly payments will fit within your budget—even under worst-case scenarios. Prioritizing affordability will keep you on solid financial ground and reduce the risk of missed payments.

5. Consider Buying Hybrid or Electric Vehicles

While electric vehicles (EVs) and hybrids can be more expensive upfront, they often save money in the long run due to lower fuel costs and maintenance requirements. Additionally, many states offer tax credits or specialized loans for eco-friendly cars, making them more affordable.

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