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The Federal Reserve doesn’t directly set auto loan rates — but it does affect the cost for lenders to borrow money.
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The Federal funds rate was cut for a third and final time in 2025 and was not changed in the first meeting of 2026, so it currently sits at 3.50-3.75%.
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High interest rates have offset any concrete wins from stabilizing vehicle prices.
Inflation and its impacts are likely not going away anytime soon. That means high car loan interest rates will likely linger, too. The Federal Reserve dropped the federal funds rate by a quarter of a percentage point to 3.50-3.75% in December 2025. However, as Bankrate’s U.S. economy and Federal Reserve reporter Sarah Foster pointed out, this cut “only takes borrowing costs back to levels last seen in 2022, which at the time were the highest in more than a decade.”
If you plan on buying a car at the beginning of 2026, carefully compare rates with multiple lenders — and if possible, wait and see if rates continue to fall over the coming months before you buy.
Choices by the Federal Reserve affect the benchmark rate, which lenders use to set the cost of vehicle financing. Although auto loan rates depend on several factors — including your credit history — increased inflation means even drivers with perfect credit face higher rates.
“One of the Fed’s core duties is to keep Americans’ purchasing power in check, and they do it by raising interest rates,” explains Sarah Foster, senior U.S. economy reporter at Bankrate. To achieve this goal, the FOMC increased rates 11 times between March 2022 and September 2024.
According to Foster, high interest rates make borrowing more expensive. And that, combined with high costs, has been like a one-two punch to Americans’ finances. She explains that this has left many drivers “resigned to finance an exceptionally expensive big-ticket purchase at an uncomfortably high rate.”
Higher interest rates are just one result of the Fed’s goal to quell inflation. “Higher borrowing costs don’t just disincentivize spending but squeeze people out of being able to afford big-ticket items. Less spending, in turn, causes the economy to slow,” Foster says.
The increases can be attributed to the higher benchmark rate and more expensive vehicles. Stay up to date with changing news and how it affects your finances with Bankrate’s Federal Reserve hub.
The benchmark rate is one factor affecting the cost of auto loan interest rates, but industry factors affect the cost, too. Both new and used vehicle prices have been climbing since production shortages in 2020. Costs were leveling out, but tariffs on vehicles, parts and raw materials are expected to raise vehicle prices again over the summer. Higher prices mean larger loans and higher interest rates.
Your finances and loan details impact your rate, too. You’ll get a lower rate with a higher credit score, higher income and lower debt-to-income (DTI) ratio. You’ll get a higher rate for a larger loan or longer term. Additionally, the age, condition and type of vehicle you’re buying can influence your rate.
Current auto loan interest rates remain higher than pre-pandemic levels. In the second quarter of 2025, the average auto loan interest rate for new and used cars was 6.80 percent and 11.54 percent, respectively. Interest rates vary widely by credit score.
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FICO score
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New car loans
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Used car loans
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Superprime (781 to 850)
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5.27%
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7.15%
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Prime (661 to 780)
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6.78%
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9.39%
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Near prime
(601 to 660)
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9.97%
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13.95%
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Subprime
(501 to 600)
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13.38%
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18.90%
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Deep subprime
(300 to 500)
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15.97%
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21.58%
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While the interest rate you receive depends on many factors, including uncontrollable ones like inflation, you can still make moves to save money regardless of rate hikes made by the Fed.
Most lenders will have higher rates right now, but that doesn’t negate the benefit of shopping around. Compare rates and terms from at least three lenders to decide which quote is best for your needs. Pay close attention to the available APR along with the repayment term.
As vehicle prices hit record highs, focusing on your budget when shopping is vital. With little wiggle room, it is best to calculate how much you can afford before heading to the dealership. This way, you will understand how much you need to borrow to drive your new car.
Bankrate tip
Be sure to shop the total loan amount, not just the monthly payment. While taking out a longer-term loan for cheaper monthly costs can be enticing, it can be more expensive in the long run.
You are able to apply for auto loan preapproval with most lenders, which will give you a firm idea of what your expected rates will be. It can also help during negotiations at the dealership — with a loan already in place, you know exactly what you can afford to spend and potentially negotiate for lower rates through dealership financing. Not all lenders offer this step, so look for it when comparing options.
The upfront cost of an EV tends to be higher, but electric vehicles — and hybrids — do have added benefits beyond the gas pump. Although both auto loan rates and vehicle prices are high right now, you have ways to cut down on costs.
By applying for a green auto loan and applying for EV tax credits before they are eliminated at the end of 2025, you can make back any money lost due to higher interest rates. And if you don’t need your vehicle to be fully electric, a hybrid is often a more budget-friendly option that can help you save at the pump.
It may seem counterintuitive because used cars typically have higher rates, but buying a used car can save you money if you choose a car with a lower price tag. It can also help you save money every month. According to data from Experian, the average payment for a used car was $521 in the first quarter of 2025. Compared to the average new payment of $745, even a slightly higher interest rate on a used car still saves money.
One of the most effective times to consider refinancing your auto loan is when rates have lowered and your credit score has improved. The process is similar to applying for your initial loan, though there are a few extra steps on the back end.
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Evaluate your current loan. Before beginning your refinancing process, it is important to look at your current loan’s term and interest rates. Use an auto refinance calculator to understand potential monthly savings once you have those numbers in mind.
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Check your credit. By understanding your credit score, you can determine your eligibility for good rates. When it comes to refinancing — just like with any loan — the better your credit, the more competitive your rates will be.
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Shop around. Comparing auto loan refinancing rates with at least three different lenders is the key to getting a good deal. Just like your initial car loan, calculating potential costs and working them into your budget will help you avoid spending more than you need to.
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Receive new terms. If you are approved, your new lender will typically send your payoff amount to your current lender. Follow up with both lenders to make sure everything is completed on time and accurately.
Although many do not have the luxury of waiting to buy a car, patience may be on your side when it comes to saving money. Interest rates will continue to make borrowing money for your vehicle more expensive. So whether you plan to wait out the high rates or head to a dealership, prepare for higher prices to finance your vehicle.
