How is Interest Rates Supposed to Perform in 2025?

Interest rates are expected to remain a critical factor in shaping borrowing costs for mortgages, auto loans, and credit cards in 2025. The Federal Reserve has already announced that they’ll likely halt interest rate hikes in 2025, which would impact borrowing costs systematically. From mortgages to credit cards, here’s what the picture could look like next year, according to Investopedia.

Rates on Mortgages Will Continue to Rise

Some minor changes to the federal funds rate might happen, but economists expect mortgage rates to stay relatively high. Contrary to the case with credit cards, mortgage rates are not solely based on the federal funds rate, but rather on 10-year Treasury yields.

Wells Fargo expects mortgage rates to decrease only slightly to somewhere around 6.3% by 2025. In the same way, Fannie Mae economists expect rates to remain at or above 6%, which is a slight jump over the current 7%, but still not anywhere close to the 4% of previous years. This might prove problematic for homebuyers and mortgage refinancers, as housing loans are still expensive to obtain.

Economists predict interest rates may see slight adjustments, but any reductions are unlikely to bring significant relief to homebuyers or those refinancing mortgages.

Car Loan Rates Might Go Down, But Not Forever

The auto loan market will likely be cooled off in early 2025, but economists expect the rates to rise later this year. Cox Automotive states the auto loan rate on new cars stood at approximately 9%, and used car loans were approaching 14% as of December 2024. These rates are down from their peak in 2024 and approval rates are rising.

Cox Automotive’s Chief Economist, Jonathan Smoke, thinks that the initial drop in rates could be helpful for consumers this spring. But this respite could only last so long, with rates potentially increasing in the second half of the year based on broader economic indicators.

Read more: Upcoming IRS Tax Changes 2025 You Need to Know

Credit Card Costs May Ease

Credit cards, directly tied to the federal funds rate, may provide some relief for 2025’s borrowers. The current average rate is around 24.37%, but once the three rate cuts from 2024 have really taken effect, there could be further reductions. For credit cards that have variable rates, borrowers should be on their guard and read through their terms frequently in order to keep up with rates.

Potential Policy Shifts Add Uncertainty

While the Federal Reserve’s forecast provides a map of how interest rates will trend under present conditions, something else may disrupt this trajectory. What economists worry about the most is the prospect of tariffs, pushed up by the new US president Donald Trump, that will increase inflation. When inflation begins to rise, the Fed may halt or reverse rates cuts to maintain stability.

The Federal Reserve’s cautious stance on cutting interest rates highlights its focus on balancing inflation control with economic stability.

Final Thoughts

For interest rates heading into 2025, the economic picture paints a mixed picture. But where certain markets — such as credit cards and car loans — will provide some relief, other markets, such as mortgages, will continue to challenge customers. Knowing these trends is also a great way to help individuals and companies make better borrowing decisions.