Image Credit: AP

For only the second time in a decade, the Federal Reserve is raising interest rates. If you have a major purchase coming up like a home, it’s likely you will be paying more for that loan. How the increase will affect your car loan depends on how the manufacturers react.

USA Today spoke with various financial analysts regarding how the increased rates and the proposed fiscal policy for the next administration will impact the lending markets. As of now, the base rate is set to increase a quarter of a point, with further gradual increases anticipated over the next few years.

Advertisement

The story says that the average new car loan is about 4.25 percent, while the average new car transaction price is around $34,000. If you financed $34,000 at 4.25 over 60 months your payment would be $630 a month. A quarter-point increase to 4.50 percent will bring that payment to $633 a month, which is not a dramatic difference.

However, next year the rate is set to increase in three separate increments which could total to a whole percentage point. That means if you wait another year to buy that $34,000 car, you could be paying $649 a month on a five-year loan, or an additional $1,140 over the course of the loan.

Does that mean you should run out and buy a car before the rates jump even further? Not really. With auto sales predicted to slow down from the record sales in 2015, automakers will likely increase incentives and offer subsidized financing like zero percent APR loans to move inventory off the lot.

The best time to buy a car is when you think you are ready. Don’t jump the gun because of the interest rates, especially if you owe more than what your current car is worth. Chances are everything will all balance out one way or the other.

The key thing to remember is these loan rates are based on averages. The better your credit the more leverage you will have to get the lowest rate for whatever you decide to buy. One thing you should be aware of is that credit unions are now becoming an even stronger force within the auto lending sphere. It used to be that for buyers with great credit, the credit unions couldn’t compete with the low APRs from the manufacturers, but that is starting to change. Now that rates are creeping up, the credit unions are offering very low rates for both new and pre-owned cars.

Advertisement

As the markets change, it is more important than ever to shop around and be pre-approved before you walk into the showroom. Remember, the dealers want you to sign with their banks, so a pre-approval from elsewhere gives you leverage for them to fight and get you the best rate. It also prevents some of the not so honest dealers, from pulling shady tricks with your loan.