How does the Fed interest rate affect car loans?

Key takeaways

• Decisions made by the Federal Reserve to increase the benchmark rate do not directly impact auto loans but rather the cost for banks to lend.

• The higher the Fed sets rates, the higher auto loan rates will likely be.

• At the September 2026 meeting, the central bank opted to increase rates for the first time since 2023, bringing the new target rate between 3.75%. and 4.00%.

The Federal Reserve is a complex facet of the American economic system. The Fed determines how much it costs banks to borrow money at its eight or so meetings per year. One of its jobs is setting a benchmark interest rate for short-term consumer lending, which private lenders use to set their own rates. When the federal funds target rate is high, you can expect to pay more for a personal or auto loan. The opposite is also true, with a lower fed funds rate meaning lower average rates on consumer loans.

How Fed rates affect auto loans

Auto loan rates are dictated by the time of year, the type of vehicle, the borrower's credit score and more. But the Fed sets the benchmark rate on which auto loan lenders base their rates.

However, this number does not control auto rates directly. Auto loan rates are primarily tied to the prime rate. The 11 rate increases since the beginning of 2022 meant that financing cost more money, but since then, rate decreases have led to a lower average auto loan rate through the end of 2025 and into 2026. The most recent Fed meeting in September 2026 resulted in a rate increase, but we won't know the results until the market catches up.

The interest rates discussed by the Federal Open Market Committee (FOMC) during Fed meetings are not the exact rates that consumers will be offered. Rather, they affect the cost for banks to lend to one another. Lenders may change their offered rates when the federal funds rate changes. When the Fed raises interest rates, auto loan rates may rise as well, and vice versa.

Why Fed meetings are important

Fed meetings are important because they allow anyone to get a transparent look at the economy — more specifically, how interest rates change and are expected to shift. If the Fed announces that it is raising interest rates, you can expect to encounter more expensive loans or see interest rates rise on any variable-rate loans you already have.

Learn more: Bankrate's Federal reserve hub

Ask the expert

The Federal Reserve has a direct line to your wallet. Every time the Fed meets to decide what to do with interest rates, its decisions ultimately impact how much you end up paying to finance big-ticket purchases, like homes and cars. Many Americans have been waiting for relief — on both the inflation and the interest rate front — but one won't happen without the other. Rates are unlikely to fall far enough, and fast enough, to offer borrowers major relief for the foreseeable future. Until then, it's the Americans who keep their credit score in tip-top shape, pay down debt, pay their bills on time and compare offers from multiple lenders who will find the best deals in a pricey borrowing environment.