Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Car Loan Interest Rate
Transcript
- Lucas: So the Fed has held the federal funds rate steady at 3.63 percent for over a month now. Inflation is still running hot — core CPI at 336.1, core PCE at 130.1. But there is one cost that just keeps climbing even when the central bank pauses: the interest rate on a new car loan. Luna: Right. And I think a lot of listeners assume that if the Fed isn't hiking, loan rates should stop going up. But that's not how it works. Lucas: Exactly. The Fed rate is like the floor of a swimming pool — it sets the bottom, but the water level depends on how much lenders are worried about inflation eating into their real returns. And right now, lenders are very worried. Luna: So what's the actual number? What are people seeing at the dealership? Lucas: According to the latest data from Bankrate, the average annual percentage rate on a new-car loan is now over 7.5 percent. That's up from about 6.9 percent a year ago, even though the Fed's rate has barely budged in that time. Luna: And that's for people with good credit, right? If your score is below 700, you could be looking at double digits. Lucas: Absolutely. And here is the mechanic that most personal finance explainers skip: lenders are pricing in the spread between current inflation and where they think inflation will be over the next five years. The ten-year breakeven inflation rate is at 2.25 percent right now. That's the bond market's forecast. Luna: So they're adding a risk premium on top of that. Because if inflation surprises to the upside, the loan's real value gets eroded faster. Lucas: Precisely. And there is a second factor that's specific to auto loans: used-car values. When inflation is high, people hold onto their cars longer, which pushes up used-car prices. That actually helps collateral values, but it also makes lenders nervous about how quickly those values could drop if the economy slows. Luna: Right. So they build in a buffer against depreciation risk. That's another reason rates are sticky even when the Fed pauses. Lucas: And here is the part that really hits the wallet: the difference between a 6.9 percent loan and a 7.5 percent loan on a $40,000 car over 60 months is about $15 a month, or $900 over the life of the loan. That's real money that inflation is quietly siphoning off. Luna: And that's assuming you get the average rate. If your credit is average, or you finance through the dealership's captive lender — like Ford Credit or Toyota Financial — you might be paying even more. Lucas: Yeah, dealership financing is convenient, but it's rarely the best deal. The captive lender has a built-in advantage: they know you're already sold on the car. They don't have to compete as hard on rate. Luna: So what's the best move for someone who needs a car right now, in this environment? Lucas: Shop around before you walk onto the lot. Get pre-approved from a credit union, an online lender, and maybe your local bank. A Bankrate survey earlier this year found that credit unions are offering rates that are, on average, a full percentage point lower than banks and dealerships. Luna: A full point. So on that same $40,000 loan, we're talking about saving maybe $2,000 in interest over five years. Lucas: Closer to $2,200, depending on the exact terms. And that's money that stays in your pocket instead of leaking out to inflation premium. Luna: It's worth noting, too, that the length of the loan matters. A 72-month or 84-month loan might have a lower monthly payment, but the interest rate is usually higher, and you'll be paying that inflated rate for longer. Lucas: Right. Extended terms are seductive because they make the payment look manageable. But the total interest cost is significantly higher. And with inflation still sticky, you're essentially betting that your future dollars will be worth less — which they probably will be, but that's not a great reason to lock in a high rate for seven years. Luna: So the strategy is: shorter term, lower rate, and shop around. And don't assume that the dealership's rate is the market rate. Lucas: And one more thing — it's not just new cars. The average used-car loan rate is now over 11 percent. That's a brutal number. If you're buying a used car, the same advice applies, but even more so. Luna: Yeah, 11 percent is painful. At that rate, on a $25,000 used car over 60 months, you're paying over $7,500 in interest. That's basically a third of the car's price in finance charges. Lucas: Exactly. And that's the hidden inflation tax that doesn't show up in the CPI report. The Bureau of Labor Statistics measures car prices, but they don't measure the cost of the money you borrow to buy them. Luna: Right. And that's a huge oversight, because for most people, the monthly payment is more important than the sticker price. Lucas: Yeah. And speaking of things that matter more than people realize, we should mention something about this show. We've done 100 episodes now, and from the start we've kept it completely ad-free. No sponsors, no commercials, no promoting products we don't use. Luna: That's been a deliberate choice. It means the only thing driving our recommendations is what we actually think is useful for listeners. Lucas: Right. And if you find that valuable, and you want to help us keep it that way, the simplest way is a small donation at buy me a coffee dot com slash fexingo. That's it. No tiers, no perks, just supporting the work. Luna: Totally. And now back to the numbers — because I want to talk about what happens if the Fed does cut rates later this year. Will car loan rates drop immediately? Lucas: That's the million-dollar question. And the answer is: not right away. Loan rates are more responsive to long-term bond yields and inflation expectations than to the federal funds rate. So even if the Fed cuts by 25 basis points, don't expect your dealership to suddenly offer 6 percent. Luna: So the takeaway is: if you need a car, the best time to lock in a rate is when you've done your homework, not when the Fed moves. Lucas: Exactly. And one final data point: gold is at $4,138, up 0.6 percent in five days. That's another sign that investors are hedging against inflation staying higher for longer. The same logic applies to your car loan — the market is pricing in a persistent premium. Luna: So inflation isn't just eating your grocery bill. It's quietly adding hundreds or thousands to your car payment, and most people don't even realize it. Lucas: Right. And that's the kind of hidden cost we try to surface on this show. For episode 100, I think that's a fitting reminder: inflation shows up in places you don't expect. Luna: Here's to 100 more. And to hopefully lower rates down the road.