Car loan rates dip, but monthly payments keep rising—now what?

Forecasts by J.D. Power reveal that August's interest rates for new vehicle loans were slightly lower than the rates consumers received last year.

Driving the news: The average new vehicle buyer paid 6.9% interest on an auto loan in August, compared to 7.2% in August 2023, down 36 basis points from a year ago. 

• Yet, average monthly payments for new vehicles climbed to $729, up $4 year-over-year.

Why it matters: The slight drop in interest rates isn't translating into lower car payments, partly due to falling used car prices affecting consumer trade-in equity. 

• With the average used-vehicle retail price down 4.5% year-over-year to $27,999, trade-in equity has decreased by $1,433 to $7,774.

The good news for car buyers? With more vehicles filling dealership lots, prices are dropping. In July, the average transaction price for a new vehicle was $44,039 in August, a decrease of $1,895 or 4.1%, from a year ago. While these prices are still far from pre-pandemic levels, any decrease is a welcome relief for shoppers.

Looking ahead: The Federal Reserve is widely expected to announce a long-awaited interest rate cut at its next meeting on September 17-18, with economic indicators showing slowing inflation and a softening job market. 

The real question is: How big will the cut be? According to Reuters, only four major brokerages are betting on a 50-basis-point cut, while nine are forecasting a smaller 25-basis-point reduction.

What they're saying: Loretta Mester, the former president of the Federal Reserve Bank of Cleveland, told CNBC a 50-basis-point cut is possible. However, she thinks the central bank will likely avoid a larger cut to avoid signaling that they delayed too long.

• "[Jerome Powell] was very wise not to lock himself into a particular number…In my read, that would be 25 basis points, and a series of 25 basis points would be appropriate at this point, given where the economy is," she said.

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