Cox Automotive Chief Economist Jonathan Smoke offered some comments in response to the Federal Reserve’s trimming interest rates two days after the election. “The Federal Reserve stuck to the plan of cutting 25 BPs (basis points) to continue the process of moving rates away from a too-restrictive level that has contributed to lackluster retail vehicle demand of late,” Smoke stated. “There is no doubt: High rates – and limited affordability – held back new-vehicle sales in 2024. It was the first year since 2019 without supply limitations and was backed by a generally positive economy, and the market still failed to exceed the long-term sales average.”

He went on to discuss how this action might affect auto loan rates. “Auto loan rates to start November are down 30 BPs year over year for new vehicles and down 55 BPs for used vehicles,” he stated. “This is the third month in a row that rates are down on a year-over-year basis. We are seeing a bit more aggressiveness in used auto loan rates to start November, following little change observed in September and October. 

“Many lenders have room to cut yield spreads by about a point just to get back to average – in other words, they can get more aggressive on rate without really being aggressive. Lenders will be willing to do that if they feel better about the economy and loan performance. In addition, captives have room for incentive growth relative to vehicle prices. They have been remarkably disciplined so far this year with financing offers, but I suspect that may change soon.

“I expect the best time for lower rates will be by the spring,” Smoke added. “Loan performance should improve by then and the Fed will likely have lowered another 50 BPs. As a result, consumers could see 1-1.5 points of further improvement, more on used vehicles and more on captive new-vehicle deals. “I suspect some lenders will be willing to get aggressive before year-end. We will be keeping a sharp eye on rate trends and incentives. Captives and auto-focused finance companies will likely be the first to move aggressively.

“Average auto loan rates are already down 50 BPs for new-vehicle loans and 90 BPs on used-vehicle loans from peaks earlier this year. Add expected declines from the peaks by the spring, and the average monthly payment could be down as much as 10%. 

“However, rates are not the only factor that will be changing to influence consumer interest and urgency to buy. In the months ahead, we may be traveling down a familiar path, one we traveled in 2018 when trade negotiations kicked into high gear. If consumers worry that prices could be higher in a few months and choices more limited – thanks to tariffs and the possibility of a trade war – it will change their urgency to buy sooner rather than later.”