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Why the Fed's rate cut won't immediately help car buyers or sales

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Federal Reserve Rate Cut: Impact on Auto Sales #

The Federal Reserve’s recent decision to cut interest rates for the first time in over four years is anticipated to have a positive effect on new vehicle sales. However, the impact may not be as immediate or substantial as some might expect.

Current Auto Loan Rates #

Auto loan rates remain near decades-high levels:

  • New vehicle: over 9.61%
  • Used car or truck: nearly 14%

These high rates continue to pose challenges for potential car buyers.

Delayed Impact on Auto Loans #

The rate cut’s effect on auto loans is expected to be gradual:

  • Auto loan rates are influenced by longer-term bond yields
  • Changes in auto loan rates can be delayed compared to other types of loans
  • The most significant improvement in auto loan rates is not expected until early next year

Persistent Affordability Challenges #

Despite the rate cut, affordability issues in the auto market are likely to persist:

  • Near-record-high average new vehicle prices
  • Inflated used vehicle prices
  • Higher auto loan delinquency rates compared to pre-pandemic levels

Recent data on auto financing shows:

  • Average financing for a new vehicle: over $40,700
  • Average payoff term: 68.8 months (5.7 years)

This represents a significant increase from pre-pandemic levels, resulting in higher monthly payments for consumers.

Potential Relief #

If interest rates continue to decline:

  • Consumers may see some relief in monthly payments
  • Each point decrease in the Fed benchmark rate could potentially reduce the average monthly payment for a new vehicle by approximately $20

While the rate cut is a positive development for the auto market, it’s clear that affordability challenges will continue to be a significant factor for car buyers in the near term.