When Will Car Interest Rates Drop?

The Federal Reserve cut rates in September for the first time in 2025, putting the new target rate at 4-4.25 percent. Interest rates started declining after the last rate cut in December, but crept back up by the end of the second quarter.

Car prices have increased, and inventory shortages have raised some used car prices close to the average price of new cars. Strong consumer demand, lingering shortages from the COVID-19 pandemic, inflation and consumer preferences have driven these increases. Tariffs on raw materials, as well as on vehicles themselves, are also expected to drive up prices by the end of summer.

Auto loan rates likely won’t decrease this year

To put it simply, auto loan rates aren’t expected to decrease measurably this year. This is primarily due to the continued work by the Federal Reserve to quell inflation, but interest rates for both new and used vehicles have steadily increased since the pandemic began in 2020.

“Rising prices for both new and used vehicles have led more buyers to rely on financing and extend their loan terms at the time of purchase, says Stephen Kates, senior financial analyst at Bankrate. ”While borrowing rates have begun to decline slightly, longer loan terms can result in higher interest rates and substantially increase the total interest paid over the life of the loan.”

But higher interest rates aren’t the only thing making car loans more expensive this year. New car prices in September 2025 were still more than $10,000 higher than they were in 2020, according to Kelley Blue Book — and a more expensive car will cost more for borrowers to finance.

Is now a good time to finance a car?

The answer comes down to your needs. If you have a set of wheels in the driveway that get you from point A to point B, it might be smart to stick with what you have. But if you need a vehicle, prepare to spend more money on financing, especially if you have poor credit.

Competitive rates for poor credit borrowers will be hard to find

Access to credit is tightening, especially for those with poor credit. While auto loan approval rates increased by 0.2 percent overall, the share of approvals for those with subprime credit fell sharply. Lenders are reacting to inflation, high vehicle prices, high interest rates and growing delinquency rates.

President Trump’s tariffs have also created uncertainty throughout the economy. The auto industry is particularly slow to adapt, and consumers will face even higher vehicle prices. For now, many manufacturers are absorbing these costs, and luring customers with cash-back and employee pricing incentives. However, existing inventory is declining, and new imports will be subject to tariff pricing.

Those impacted most disproportionately are those with poor credit histories, explains Kates.

“Lenders are increasingly wary of rising delinquency rates, which means borrowers with lower credit scores may face tighter loan terms and smaller loan amounts,” Kates explains.

Unlike those with strong credit, bad credit borrowers do not have the leverage to find the best available rates. Borrowers falling under the deep subprime category, between 300 and 500, can expect rates of over 15 percent for new cars and over 21 percent for used cars, according to the Experian State of the Automotive Finance Market report.

High prices hit wallets harder than interest rates

Average loan amounts increased slightly from $41,720 for a new vehicle in the first quarter of 2025 to $41,983 in the second quarter. While used vehicle prices began stabilizing in early 2025, prices ticked up and average used loan amounts increased to $26,795.

Many borrowers are already feeling squeezed out of the auto market. If prices increase the way they are expected to, many more drivers will find themselves struggling to get behind the wheel. Consumers are facing higher loan amounts and higher monthly payments that could further increase already high interest rates. In addition, down payments have already decreased since the last quarter of 2024 and are likely to continue decreasing as prices rise.

The used car market is also feeling the impact. Prices have been elevated since the COVID-19 pandemic, when chip shortages led to fewer new cars being built. Consumers have also chosen to keep their cars longer rather than pay high prices. Yet as new vehicle prices increase to historic levels, it’s likely that used vehicle prices will rise with them.

How to still get the best auto loan deal

You may need to buy a car even when the economy’s set against you. If so, consider the following tips to still walk away with a good deal.

• Shop around. Although most lender options currently offer similar rates, shopping around and finding the best rate you can secure is still important. You can save extra money by paying close attention to additional fees that lenders may enforce.
• Find the true cost of ownership. Vehicle ownership costs are more than just your monthly car payment. Instead, take the time to calculate the true all-in cost, which covers aspects like trips to fill up your tank or maintenance along the way.
• Lock in the expected rate. If your lender offers it, applying for loan preapproval will tell you exactly what you will have to pay each month.
• Consider driving an EV. Outside of the clear environmental benefits, driving electric can cost you less money throughout the ownership. EV incentives can also put money back in your pocket.

The first time a car shopper learns their credit score shouldn’t be at the dealership financing desk, Kates says. “Planning ahead and improving your financial standing several months in advance can put you in a stronger position to get approved and qualify for a lower annual percentage rate (APR).”

Bottom line

It’s hard to know without a crystal ball, but experts think auto loan interest rates likely won’t come down significantly anytime soon. With that in mind, spend this time building your credit to ensure that no matter what the available rates are you will benefit from the most competitive ones offered.