For most of the year, tariffs and the threat of them have forced auto companies to increase their spending on incentives to attract buyers.
Buyers have responded to that signal, leading to a record pace for auto companies like Ford, General Motors and Kia.
Auto loan rates play an important role in many buyers’ car purchasing decisions. And while the U.S. Federal Reserve has stayed on the sidelines for most of the year when it comes to interest rates, this week the central bank cut rates for the second time in as many months.
While the Fed’s benchmark rate doesn’t have a direct correlation to auto loan rates, there are things every car buyer should know about the Fed’s latest decision.
Federal Reserve Chair Jerome Powell says the Fed will cut interest rates for the second time in two months.Caballero-Reynolds/AFP via Getty Images
The announcement that affects car buyers the most is the Federal Reserve’s decision to end quantitative tightening.
By ending QT, the Federal Reserve is no longer reducing its balance sheet by allowing assets, such as Treasuries and mortgage-backed securities, to mature without reinvesting principal, effectively removing money from the financial system.
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QT is a way to combat inflation and decrease the money supply.
The Federal Reserve began this latest round of quantitative tightening in June 2022 and is scheduled to conclude the program on December 1, 2025.
So why should car buyers pay attention to that news?
“QT puts downward pressure on long-term rates, which have the greatest impact on auto loans and mortgages,” said Jonathan Smoke, chief economist at Cox Automotive.
As the quarter ends, the Federal Reserve will look to maintain the size of its balance sheet and that will mean buying Treasuries and possibly mortgage-backed securities as existing holdings mature. That buying activity should at least remove upward pressure on longer-term rates, including those on auto loans.
The Federal Reserve cut its benchmark interest rate range by a quarter point, to between 3.75% and 4%, which is the lowest level in three years, but that rate is still considered restrictive.
Federal Reserve bankers also voted to lower rates in September after August data showed stagnant job growth, and employers saw the slowest job growth rate since 2010.
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While the average mortgage rate has fallen 24 basis points so far in October, the average new auto loan rate has moved in the opposite direction, just as it did in September.
Auto loan rates rose 19 basis points in October and jumped 32 basis points in September. The average auto loan rate of 9.41% in September was down 17 basis points year over year.
Cox Automotive expects auto loan rates to remain high through November, and year-end sales and December rate deals will help cool the market in the final month of the year.
“New rates are rising primarily due to fewer special offers from manufacturers’ captive financing arms. Fewer low-rate specials mean an increase for prime and premium borrowers who disproportionately benefit from special offers,” Smoke said.
It seems intuitive, but car buyers with the best credit scores get the best deals on car purchases, new or used.
Consumers with credit scores of 760 or higher are seeing average rates of 5.5% on new cars and 6.9% on used loans in October, according to Cox Automotive. The average used car loan was 14.2% in September.
“In the used market, average rates have increased primarily for subprime buyers as lenders’ risk aversion has increased in the wake of some anomalous but high-profile auto loan bankruptcies,” Smoke said.
So when should car buyers expect to see lower rates?
“As noted, Chairman Powell made it clear that a December cut is not guaranteed, but we still believe the Fed will cut one or two more times by the spring,” Smoke said. “With loan yields also likely to improve by then, consumers should see average auto loan rates drop by a full percentage point or more by summer 2026.”
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This story was originally reported by TheStreet on October 31, 2025, where it first appeared in the Automotive section. Add TheStreet as a preferred source by clicking here.