Buying A New Car? Here's The Unfortunate Truth About Interest Rate Cuts On Car Payments

On September 17, 2025, the Federal Reserve lowered interest rates by a quarter-point, an action that caused the benchmark interest rate in the United States to fall between 4% and 4.25%. The Fed's action means it will cost banks and financial institutions less money to loan out funds to businesses and consumers. But that doesn't mean interest rates for things like car loans will fall right away, experts warn. In fact, Bankrate financial analyst Stephen Kates predicted to CNBC that the rate drop will not have any immediate effects on interest rates. Instead, he suggested it may take multiple rate drops to really make a difference for borrowers, though the Fed has already hinted that two more may come before 2026.

But that may also have the unfortunate side effect of increasing inflation, which may increase the sticker price for cars, groceries, and other goods. Inflation has already increased the price of essential household items thanks to new taxes on foreign goods levied by the Trump Administration, although CNN reports the Federal Reserve's vice chair for supervision, Michelle Bowman, believes that the tariffs' impact on inflation is only temporary.

So far, 2025 has not been a good time to buy a car and that is largely due to President Donald Trump's tariffs making some American cars more expensive. Elevated interest rates did not help either. According to a June 2025 Experian study, loans for a new car can range between 5.18% and 15.81%, depending on the buyer's credit score. The rates for used cars increase even further, ranging from about 6.8% to 22%.

The lower the score, the higher the interest rate charged. Since FICO recently revealed that Americans' credit score average dropped by three points between 2023 and 2025, that means affordable loans are getting harder and harder for borrowers to come by. Part of the reason for the lower credit scores is that many Americans, especially younger adults, have had to make tough choices on their finances due to higher living costs and outstanding student loans, according to a FICO report.

And that has made car loan payments higher for a lot of consumers. Per a report from Edmunds, almost 20% of Americans were paying more than $1,000 a month on car loan payments in the second quarter of 2025. More than 22% of borrowers were also opting to pay off their loans in 84 months that quarter, which Edmunds reports is almost double the length of loan terms from 2019.

Cox Automotive analyst Erin Keating told the Washington Post that, while lower interest rates would be a huge financial relief for people with car loans, a Fed cut alone won't make that happen. Instead, banks are influenced by multiple forces including a buyer's credit score, bond yields, and how many bad loans are in their portfolio. And loan delinquencies are on an upward trend: FICO reports there has been a 24% increase in people being delinquent in their car loans between 2021 and 2025.

Another factor is demand. If there are a lot of people applying for car loans, their interest rates will likely remain high, said Keating, per the Washington Post. And the demand for people wanting a new car may remain high. According to a report from Cox Automotive, 16.2 million cars are expected to be sold by the end of 2025, an increase of 6% from the previous year. Among the reasons for the likely spike in sales was higher returns from a booming stock market (for those with enough funds to invest) and a worry among consumers that if they don't buy now, car prices will go up even higher in the coming years.