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The Federal Open Market Committee (FOMC) sets the default rate, which affects the fixed rates of auto lenders.
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When the level of government funding fluctuates, so does the cost of financing a car.
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The Fed raised the benchmark rate 11 times between 2022 and 2023 and cut it three times in 2025, before holding back slightly in January and March 2026.
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Although auto loan rates have started to drop, it will likely take several rate cuts before borrowers see significantly lower rates.
Over the past two years, Americans have experienced higher auto loan rates as the Federal Reserve has worked to stem inflation by raising the federal funds rate. But with the rate cut in the fall and winter of 2025, the results are questionable: The inflation rate is around 2.4%, still above the Fed’s 2% target.
The Federal Reserve unveiled its final rate cut target for December 2025, bringing the target rate to 3.50-3.75%. At the January and March 2026 meetings, it chose to keep its target rate unchanged. So while car loan rates may come down over time, relief may be slow in coming.
How the Fed affects auto loans
The Federal Open Market Committee sets the federal funds rate limit, which has a domino effect on auto loan rates.
The key to saving money is being prepared. So, while the cost of borrowing money is rising, there are still ways to get your lowest rate.
By applying for an auto loan pre-approval, you can cover your expected monthly expenses before signing for your car. It gives you a solid insight into the true cost of your new car and gives you a leg up during negotiations. You can also use the pre-approved amount when comparing other loan options.
Trading in your current car is a great way to drive a new car while spending less money on a down payment. It will also save you the hassle of selling your car privately.
Experts recommend that you compare at least three different loan offers when looking for car financing. Don’t sign the first deal you come across, and understand that seller financing is often more expensive than financing from outside lenders.
As with all major purchases, it’s important to calculate the cost of your loan ahead of time to ensure you’re only signing for a car you can afford. This way, you can ensure that you are able to keep up with your monthly payments and prepare yourself for even the worst case scenario.
While purchasing EVs often carries a high purchase price tag, they can cost significantly less over the lifetime of ownership. Check out special tax credits offered in your state and green car loans to save money on an environmentally friendly car.
At the December 2026 meeting, the Fed announced its third cut of the year – a quarter of a percentage point, setting the federal funds rate at 3.50-3.75%. In both the January and March 2026 meetings, no changes were made, so the target level remains the same.
Bankrate’s senior economics reporter, Sarah Foster, says policymakers “continue to pencil in two more recessions in 2025, despite simultaneously expecting inflation to rise.” Some Fed officials have also indicated that they do not want to wait too long to see what happens with inflation because high rates alone increase the risk of recession.”
Unfortunately, even though the federal funds rate is no longer at a 22-year high, there may not be a decrease in the cost of auto loans for the average consumer anytime soon.
“Throughout history, when inflation rises or looks like it’s about to take off, the Federal Reserve has been called to action,” Foster explained.
They do this by “raising interest rates to cool demand and bring rates back to a better balance,” he concluded. And that’s what the FOMC has been for – to raise rates to try to deal with inflation. But many Americans, he explains, see the pain before they see the gain.
Borrowers are feeling the pain when financing big-ticket items like new cars, especially as inflation and tax threats keep prices high. Lenders have raised rates over the past few years due to high levels of oversight. And these high rates, combined with high prices, have made the environment a challenge for many.
Drivers who finance used cars pay an average of $532 each month, and those who finance new cars pay $748 each month, according to third-quarter data from Experian.
Although annual prices are increasing slightly, new car prices are increasing compared to previous years and discounts are also increasing.
While it’s true that a rising stop rate will affect your available rates, it’s not all bad news. The FOMC came in low, car prices are down and there are still ways to save money when financing your car.
Stay up-to-date on current Federal Reserve news, understand how future changes may affect your budget and compare available loan rates.
