On Wednesday, the Federal Reserve cut the Fed Funds rate by 0.50%, the largest reduction in 16 years, bringing the key rate to 4.75%-5%. While this move is expected to lower borrowing costs for consumers, the impact on monthly payments may not be immediate. According to a NerdWallet survey, 61% of respondents planned to take financial action once rates dropped. Of these, 25% intend to buy a car, 20% plan to invest savings, while others look to refinance loans or apply for new credit cards.
Despite this anticipation, the immediate impact of the rate cut on consumer loans will likely be minimal, except for large mortgages, where even small rate changes can lead to significant savings. Experts predict rates will decline gradually, with more noticeable effects on household finances emerging in late 2024 or 2025 as the Fed continues a series of rate reductions.
CAR LOAN RATES
Auto-loan rates have already started to drop, with current rates at 6.84%, offering car buyers about $20 in monthly savings. However, a full percentage-point decline would only reduce average monthly car payments from $740 to $718. Auto-loan rates are expected to remain “sticky” on the way down, and significant declines may take time. The average five-year car loan rate is forecasted to fall to around 7% by the end of 2025, but high car prices—now averaging over $49,000—remain a major affordability issue.
MORTGAGE RATES
Mortgage rates, meanwhile, have eased from near 8% in late 2024 to 6.35%, with Fannie Mae projecting a further decline to 6.1% by mid-2025. For a typical $340,000 loan, this could mean a $50 reduction in monthly payments, from $2,115 to $2,060. If rates fall below 6%, it could unlock significant home-buying demand. However, only about 14% of outstanding mortgages have rates high enough to make refinancing worthwhile.
SAVINGS RATES
On the flip side, as the Fed cuts rates, high-yield savings accounts and CDs, which many consumers have used for emergency funds, will offer lower returns. CD rates have already seen 53 decreases this year, though locking in higher rates now could be a smart move for those comfortable with fixed terms. Banks have already reacted with the 1 yr. CD rate dropping to 4% on Wednesday from 5% in the last few months.
In summary, while consumers can expect some relief from lower borrowing costs, it may take several rate cuts before significant savings are realized, especially for auto loans and mortgages. Affordability challenges persist, driven by still-high prices for cars and homes, but as rates continue to decline, the financial landscape could shift by the end of 2025.