The Federal Reserve on Wednesday raised its benchmark interest rate by 0.25 points to 5.25-5.5 percent. This decision has the potential to result in higher interest rates on auto loans, affecting both auto dealerships and customers.

When the Federal Reserve increases its benchmark interest rate, it impacts the prices lenders pay to borrow money. These costs can then be passed on to consumers in the form of higher interest rates.

Prior to this latest increase, the Federal Reserve had already raised its target rate by 5 percentage points through a series of increases since March 2022. This marks the highest U.S. central bank policy rate in 16 years.

In its statement, the Federal Reserve indicated that it will continue to assess additional information and its implications for monetary policy. It will monitor incoming data and study the impact of rate hikes on the economy to determine the extent of additional policy adjustments needed to reach its 2 percent inflation target.

Meanwhile, interest rates for new and used vehicles have been rising. According to Edmunds, new-vehicle interest rates increased from 4.5 percent in March 2022 to 7.2 percent in June 2023, and used-vehicle APRs rose from 8.1 percent to 11 percent. This means higher costs for consumers looking to finance their vehicle purchases.

Despite the potential impact of higher interest rates, auto sales are not expected to be significantly affected. Fleet and pent-up consumer demand have contributed to strong sales in the second quarter, even with interest rates surpassing 7 percent during that period.

However, dealerships may face challenges in capturing revenue from these sales if higher interest rates lead customers to opt for cash deals or seek cheaper financing options outside of the dealership. The percentage of dealer-financed sales has already declined, and leasing has regained popularity.

Overall, while higher interest rates may present challenges for auto loans, the industry remains optimistic about continued sales growth for the remainder of the year.

Reuters contributed to this report.