blogPost auto3

How to Get the Best Auto Loan Interest Rates During Inflation

If it feels like your money isn’t going as far as it used to, you’re not alone. Inflation has been on the rise for several years, and in June 2023, the year-over-year inflation rate reached a four-decade high. This scale of inflation has an effect on just about every product, and this is especially true for the auto market. 

Whether you’re searching for a new or used car, you may be wondering how to score the best rate on an auto loan in this inflationary environment. 

Below, we’ll outline several inflation-related market strategies you can employ to find the lowest auto loan interest rate. We’ll also discuss how to compare auto loan rates from various lenders online. 

Understanding Inflation Impact on Loans

Inflation can impact the cost of auto loans by increasing their interest rates. Here’s how these two concepts are connected: 

  • Inflation measures the rate at which the cost of goods and services is rising. High levels of inflation reduce the purchasing power of money.

  • Interest rates determine the cost of borrowing money. The Federal Reserve sets the federal funds rate, which banks and credit unions use as a benchmark when determining their interest rates.

During inflationary periods, the Federal Reserve may raise the federal funds rates to encourage consumers to borrow less and save more. The resulting decrease in demand for products and services can slow inflation over time.

So, what does this mean for auto loans? During times of high inflation, auto loans typically come with higher interest rates.

How to Get the Best Auto Loan Interest Rates

No matter the economic conditions, there are a few strategies you can employ to get the best rate on your auto loan. These strategies include:

  • Shopping around – While most lenders quote higher rates during inflationary periods, some may boast lower rates than others. Credit unions in particular are known to have lower interest rates than traditional banks or car dealerships.

  • Boosting your credit score – Lenders base your auto loan interest rate on your credit score. Having a high credit score can help you qualify for lower rates. Thus, you may want to raise your credit score before purchasing a new car.

  • Taking out a smaller auto loan – Along with your interest rate, your car’s purchase price can impact the size of your monthly auto loan payments. If you want to secure lower payments, set a reasonable car shopping budget, save up for a larger down payment, and negotiate the purchase price with your car dealer.

Your Credit Score’s Effect on Auto Loan Rates

Your credit score and loan’s interest rate are closely correlated. In fact, your credit score is the biggest factor banks and credit unions use to determine your auto loan interest rate. 

You can boost your credit score before taking out an auto loan by:

  • Making all of your credit payments on time
  • Paying down your credit card balances
  • Keeping old credit card accounts open
  • Avoiding new credit applications for at least six months 
  • Disputing errors on your credit reports

Comparing the Best Auto Loan Rates

If you’re ready to find the best auto loan rate, you can start comparing loan rates from different types of lenders. As you do, you’ll likely notice that credit unions offer lower rates, more flexible repayment terms, and better customer service.

At CUSelect, we can help you find credit unions in your area

Negotiating Interest Rates With Auto Loan Lenders

Once you find a lender you like, you can apply for an auto loan with them. If you want to secure a low interest rate, consider:

  • Applying with a cosigner who has excellent credit
  • Selecting a loan with a shorter repayment period
  • Making a larger down payment

Fixed vs. Variable Rates for Auto Loans

Auto loans can come with flexible interest rates or variable interest rates. Fixed interest rates stay the same for the entire duration of a loan’s repayment period, while variable interest rates fluctuate alongside the Federal Reserve’s prime rate or another index. 

Both types of interest rates have pros and cons:

  • Loans with fixed interest rates come with predictable monthly payments. However, they may end up being more expensive if they’re taken out during times of inflation.

  • While payments for loans with variable interest rates may fluctuate from month to month, they often become more affordable as inflation and interest rates decrease. 

Timing Auto Loans in an Inflationary Environment

Inflation often gets a bad reputation, but it has some benefits for borrowers. Namely, inflation can lead to higher wages, allowing borrowers to list higher incomes on their auto loan applications. 

Not only can a higher income help you qualify for an auto loan, but it may also help you pay it off early and save money on interest.

Strategies for Mitigating Inflation’s Impact on Auto Loans

Borrowing in an inflationary economy may be costlier, but you don’t have to settle for your initial interest rate. Like many other types of loans, auto loans can be refinanced down the line. 

When you refinance a loan, you get the chance to alter its interest rate and repayment term. Your new rate will be based on the economic conditions and your creditworthiness at that time. Thus, you can always apply for an auto loan today and refinance it when interest rates go down. 

Note: If you already have an auto loan, you may want to avoid refinancing during inflation, as it will likely increase your interest rate. 

Find Affordable Credit Union Auto Loans Near You

In summary, it’s possible to find an affordable auto loan during times of high inflation. You just need to shop around and be strategic with your choice of lender. If you want to find a low-interest auto loan, check out your local credit union’s offerings.