Why lower Fed rates won't immediately help car buyers or sellers

DETROIT – The Federal Reserve's decision to cut interest rates for the first time in more than four years is expected to finally boost new car sales, but not as quickly or as much as some might hope.

The half-percentage-point, or 50-basis-point, rate cut earlier this month will take time to drop auto loan rates, which have hovered around decades—more than 9.61% for a new car and about 14% for one. Used car or truck according to Cox Automotive.

“If the Fed is correct in their forecast, we'll be living with rates two and a half points higher than most of the last 24 years,” said Jonathan Smoak, chief economist at Cox Automotive. “In other words, the situation will be better than what we endured for the past year, but the affordability challenges will not be solved by this new path for rates.”

According to Smoke, the biggest near-term improvement in auto loan rates isn't expected until early next year. He said that unlike home loan costs in recent months, auto loan rate changes may be delayed because they are really long-term bond yields that are based on loan performance.

According to Thursday's note from the Board of Governors of the Federal Reserve System, the 30-day delinquency rate on auto loans has risen significantly in recent years. Although they remain below the peak of the Great Recession, by the end of 2023, auto loan delinquency rates have surpassed pre-pandemic levels by nearly 60 basis points.

In addition to high interest rates, consumers continue to face near-record-high average new car prices and inflated used car prices. Both have fallen from peaks during the Covid pandemic and supply chain issues in recent years but remain higher than historical levels.

Edmunds.com reports that the average financing for a new car was more than $40,700 in August, with a payment term of 68.8 months, or 5.7 years. That compares to the average financing before the pandemic of about $33,000 in September 2019, or 5.8 years.

According to Edmonds, the difference in that payment over contract terms is $3,162, or $178 more per month.

“New vehicle sales fell slightly in the third quarter as affordability challenges in the form of historically high prices and interest rates loomed large for American car buyers,” said Jessica Caldwell, head of insights at Edmunds.

If rates continue to fall, customers will see some relief in monthly payments. BofA Securities estimates that each point drop in the Fed benchmark rate equates to a drop of about $20 in the average monthly payment for a new car.

– CNBC's Michael Bloom Contribute to this report.