How to save on auto loans as the federal funds rate changes

Rebecca Betterton

Thu, September 17, 2026 at 5:33 PM GMT+3 4 min read

Key takeaways

The Federal Open Market Committee (FOMC) sets the benchmark rate, which impacts the rates auto lenders set.
When the federal funds rate fluctuates, so will the cost to finance a vehicle.
The Federal Reserve chose to raise the Fed funds rate in September 2026, which marks the first increase since 2023.
While auto loan rates have begun to decrease, it will likely take several rate cuts before borrowers see significantly lower rates.

Over the past two years, Americans have faced steep auto loan rates as the Federal Reserve worked to quell inflation by pumping up the federal funds rate. But even when the rate dropped in the fall and winter of 2025, the effects are questionable: The inflation rate is about 2.4%, still above the Fed's goal of 2%.

The Federal Reserve rolled out its first federal funds target rate increase in September 2026, bringing the target rate between 3.75% and 4.00%. This follows multiple rate cuts through 2025 and may lead to more expensive vehicles for the rest of the year and into 2027.

How the Fed affects auto loans

The Federal Open Market Committee sets the benchmark federal funds rate, which has a domino effect on auto loan rates.

How to save money regardless of the Fed rate

The key to saving money is preparedness. So, while the cost to borrow money increases, there are still ways to find your lowest possible rate.

Apply for loan preapproval

By applying for auto loan preapproval, you can lock down your expected monthly cost before signing off on your vehicle. It gives you a firm grasp on the true cost of your new car and gives you a leg up during negotiation. You can also use the preapproved rate when comparing other loan options.

Consider a trade-in

Trading in your current vehicle is a great way to drive off with a new car while spending less cash on a down payment. It will also save you the headaches of selling your car privately.

Shop around

Experts recommend that you compare at least three different loan offers when looking for vehicle financing. Do not sign off on the first deal you come across, and understand that dealer financing often costs more than financing offered by outside lenders.

Focus on affordability

As with all large purchases, it's essential to calculate your loan cost ahead of time to ensure that you only sign off on a vehicle that you can afford. This way, you can ensure you can keep up with your monthly payments and be prepared for even the worst-case scenario.

Buy hybrid or fully electric

While buying EVs tends to carry a higher purchase price tag, they can be much less expensive over the lifetime of ownership. Check out special tax credits offered in your state as well as green auto loans to save money on an eco-friendly vehicle.

Recent Fed decisions

At the September 2026 meeting, the Fed announced its first rate increase since 2023 — a quarter of a percentage point, putting the federal funds target rate between 3.75% and 4.00%. This follows multiple rate cuts over the last few years and a static Fed funds rate through 2026.

Unfortunately, while the federal funds rate is no longer at a 22-year high, there may not be a reduction in the cost of auto loans for the average consumer any time soon.

"Throughout history, when inflation rises or even looks like it's about to take off, the Federal Reserve has been called to action," explains Sarah Foster, former senior economy reporter at Bankrate. She continues to explain the Fed considers "raising interest rates to cool demand and bring prices back into better balance."

And this is what the FOMC has been up to — raising rates to try and address high inflation. Most Americans, she explains, see the pain before they see the gain.

Borrowers feel that pain when financing big-ticket items such as new vehicles, especially as tariffs and a poor economy keep prices high. Lenders raised rates over the last few years in response to a higher benchmark rate. And these higher rates, combined with higher prices, have made the environment challenging for many.

How much are drivers spending?

Drivers financing used cars in the middle of 2026 had an average interest rate of 11.19%, while borrowers who financed new cars had an average interest rate of 6.35%, according to data from Experian. The Fed rate does play a small role in the interest rate you pay — and auto loan rates did go up following the announcement — but the actual affect on how much you spend on your auto loan will be limited based on when you buy and whether you choose to refinance in a high-rate environment.

Bottom line

While it's true that a steep benchmark rate will impact your available rates, it is not all bad news. The FOMC has stepped in with a lower base rate, vehicle prices have declined and there are still ways to save money when financing your vehicle.

Stay up to date on current Federal Reserve news, understand how future changes can impact your budget and compare available loan rates.