Alice Morgan Photo Illustration by Investopedia
The Key Takeaways
- Federal Reserve is expecting to reduce its federal funds rate, which has a significant impact on the economy in the coming year at a lower pace than originally anticipated.
- All borrowing costs including auto loans, home mortgages and all other types of credit can be affected.
- Some of President-elect Donald Trump's proposed policies could affect the course of interest rates, depending on how they play out.
Federal Reserve has put a brake on any possible interest rate reductions in 2025. This could impact your borrowing costs for the coming year.
Rates for car and mortgage loans are generally lower than those of credit cards or personal loans. Most loans, however, are affected in some manner by the Federal Funds Rate, set by the Federal Reserve in order to keep inflation under control.
Fed officials revised their forecasts of a reduction in the Fed Funds Rate in the New Year in mid-December. This means that interest rates on all kinds of loans, from car notes to mortgages, could remain higher longer. How consumer interest rates may change in 2025.
The mortgage rates will remain high
The Fed is expected to make interest rate changes in 2025. However, economists do not expect that much of this reduction will trickle down into home loan borrowing rates.
The 10-year Treasury yield is more important than the Fed Funds Rate in determining mortgage rates.
Wells Fargo’s forecasters estimated that the mortgage rate would only drop to about 6.3% in 2025. Fannie Mae economists also forecast that mortgage rates will remain above 6%.
This is lower than current mortgage rates, which are around 7%. However, it’s still higher than average mortgage rates in the market of about 4%. This means that, if you are buying a house in 2025, the interest rates will be higher. For those who are looking to refinance their home, chances of getting a lower rate may be low.
The rate of car loans could drop and then bounce back
The economy is expected to show some improvement for car loans in 2025.
Cox Automotive reports that the average auto-loan rate in early December for new cars was about 9%. Rates for used vehicles, however, were around 14%.
“As we head into 2025, average auto loan rates are a full point lower from their peaks earlier in 2024, and approval rates are increasing,” Jonathan Smoke, Chief Economist at Cox Automotive. “This should be good news for business in the months ahead, but the path is not set. After some decline in the spring, rates could begin rising again.”
The cost of credit cards could be reduced
Fed funds rates heavily influence credit card interest rate, which are typically indexed with the benchmark. They move together.
Investopedia has just released the most recent research that shows the average rate of interest on credit cards in December was 24.37 percent. This number is expected to decrease as three Fed rate reductions in 2024 work their way through the economy.
The interest rate on credit cards can change at any time. It’s crucial to consult your bank about your borrowing rates to know how they are changing.
Uncertainty in Tariff Proposal
It is possible that, despite projections about the future of interest rates based on current economic conditions and their likely trajectory, there could be changes in credit terms.
The economists are watching closely for tariffs from Donald Trump, who is set to be president-elect. These could cause inflation. The Federal Reserve may have to slow down its interest rate cuts if price pressures remain elevated.
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