How Interest Rates Can Affect the Purchase of Your Next Car

When it comes to buying a car, one of the most important considerations is how you will finance it. The interest rate on your car loan can have a significant impact on your monthly payments, the total cost of the loan, and even the type of car you can afford. In this article, we will explore how current interest rates can affect the purchase of a car.

First, let’s start with the basics. Interest rates are the cost of borrowing money. When you take out a loan, you are essentially paying for the privilege of using someone else’s money. The interest rate is the percentage of the loan amount that you will pay in addition to the principal (the amount you borrowed).

Currently, interest rates in the United States are relatively low. In fact, they are at historic lows, with the Federal Reserve keeping the federal funds rate near zero percent since March of 2020 in response to the COVID-19 pandemic. As a result, car loan interest rates are also low. According to Bankrate, the average interest rate on a 60-month new car loan was 3.24% as of February 2023.

So, how does this low interest rate environment affect car buyers? Here are a few ways:

Lower monthly payments: One of the most significant impacts of low interest rates is that they can lower your monthly car payments. When interest rates are low, the amount of interest you will pay over the life of the loan is reduced, which means your monthly payments will be lower as well. For example, a $20,000 car loan with a 3.24% interest rate would have a monthly payment of around $363 over 60 months. In contrast, if the interest rate were 6%, the monthly payment would be around $386.

Ability to finance a more expensive car: Because your monthly payments will be lower when interest rates are low, you may be able to afford a more expensive car than you would otherwise. For example, if you were considering a $25,000 car and could only afford a monthly payment of $400, you would need an interest rate of around 4.6% to make that work over a 60-month loan term. However, with the current low interest rates, you could make that same payment on a $30,000 car with an interest rate of 3.24%.

Lower total cost of the loan: When interest rates are low, not only do you pay less in interest each month, but you also pay less over the life of the loan. This means that the total cost of the loan will be lower than it would be if interest rates were higher. For example, if you took out a $20,000 car loan over 60 months with a 3.24% interest rate, you would pay a total of around $21,802. In contrast, if the interest rate were 6%, you would pay a total of around $23,154.

When buying a car, current interest rates can have a significant impact on your purchase. When interest rates are low, you can expect lower monthly payments, the ability to finance a more expensive car, and a lower total cost of the loan. However, it’s important to keep in mind that interest rates can fluctuate over time, so it’s always a good idea to shop around and compare rates before making a decision on a car loan.