As the United States has suffered an economic downturn in 2020, there has been increasing talk about the federal reserve imposing a negative interest rate. Most recently, on March 15th 2020, the federal reserve lowered target interest rates to 0% to 0.25%, in a move that surprised many.
But what actually is a negative interest rate, and how might that impact a car loan that you want to get or already have?
In this article, we’ll cover everything you need to know about how a negative interest rate could impact your current or future car loans.
What is a negative interest rate?
Imagine a world where it costs more to keep your cash in savings than it is to borrow money. That might sound crazy, but it’s pretty much what negative interest rates do. It’s largely considered to be an experimental strategy, so you’re not alone if you think it sounds strange.
The goal of a negative interest rate, which is controlled by the Federal Open Market Committee (FOMC), is to encourage spending and boost the economy. (Technically, banks can set whatever rate they want — but banks have strong incentives to follow the federal funds rate, so this isn’t really an issue).
For example, if car loan interest rates become really low, consumers are more likely to make purchases. This increase in spending would hopefully boost the economy and discourage people from hoarding their cash. Conversely, keeping your cash in savings will seem less appealing, because you won’t be earning as much interest on your cash.
The big takeaway: negative interest rates make it cheaper to borrow money.
What does a negative interest rate mean for auto loans?
It’s a good time to borrow money, and yes—that includes borrowing money for a car. Auto loan rates right now are low, which means you’ll owe less money in interest. Depending on the next moves from the federal reserve, auto loan rates could continue to get even better.
Although the future of the U.S. economy is still largely uncertain, we know for sure that auto loan rates right now are lower than they have been in years. In fact, Tendayi Kapfidze, chief economist for LendingTree, has even gone so far as to call it a “a big Black Friday sale on money,” in an interview with Yahoo Finance.
Before you rush to the bank expecting free money, remember that loan rates are still impacted by many other factors, like your credit score and the loan term rate. Even when interest rates overall are low, individual loan rates still vary. Consider using online tools to compare auto loan rates and get the best deal. It’s also smart to check up on your credit score to be as informed as possible. You can check your credit score for free every 12 months from major credit reporting agencies, or use free tools like this one from NerdWallet.
Finally, taking out loans and buying a car are big decisions, and are not to be taken too lightly. You’ll want to think about your personal financial situation in a holistic way, no matter how good your prospective loan terms might be.
What can I do about my existing car loan?
As auto loan and mortgage interest rates decline across the country, it’s a good time to consider negotiating a lower interest rate on your current loan. Since the federal reserve lowered interest rates on March 15th, 2020, you can refinance your loan for a lower rate.
Refinancing typically works by replacing your old loan with a newer (better) loan, according to Mint. Your new lender will pay-off the old loan, and you’ll continue with a loan from your new lender with the better interest rate. You can also refinance with your current lender. Either way, you’re likely to get a better interest rate now that the Fed has lowered interest rates for 2020.
Final takeaways for car shoppers
- Negative interest rates mean that it’s cheaper to borrow money
- When interest rates are low or negative, it’s a good time to shop around for a car loan
- If you have an existing car loan, you can negotiate or refinance your interest rate to get a better deal
Thanks for reading!