Rising interest rates mean higher borrowing costs to buy a car

On top of elevated prices for new and used cars, financing the purchase of one is about to get more expensive.

With the Federal Reserve boosting a key interest rate by half a percentage point on Wednesday, borrowing costs are poised to head higher on a variety of consumer loans, including those for autos. This marks the Fed’s largest increase in more than two decades.

“In the past, interest rate hikes didn’t affect the new car market significantly because automakers subsidize many loans,” said Jessica Caldwell, executive director of insights for Edmunds.

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“However, this is the biggest rate hike we’ve seen in over 20 years, so there may be a small impact but it will likely only reinforce the new vehicle buyer base of higher income shoppers,” Caldwell said.

The bigger effect will likely be felt in the used car market, she said.

“Given used car prices are already at record highs, this increase will only make this market more expensive, and buyers will be forced to sit out due to affordability or buy an older vehicle to keep payments within a digestible range.”

Amid the auto industry’s persisting struggles with limited inventory due to an ongoing computer chip shortage, consumers have largely been forced to deal with new-car prices that are up 12.5% year over year, according to the most recent data from the U.S. Bureau of Labor Statistics. The average price of used cars is up 35.3% from a year ago.

The average amount paid for a new car has reached $45,232, according to an estimate from J.D. Power and LMC Automotive. The average monthly payment is about $650 for 70.2 months (just shy of six years), according to Edmunds.com. The average rate paid for dealer financing is 4.7% and the term is 70.2 months.

For used cars, the average paid is more than $30,000, Edmunds research shows. The monthly average payment is $544 over 70.7 months with a rate of 8%.