Money Rehab with Nicole Lapin - Car Loans Are a Mistake

Episode Date: May 4, 2022

We'd sugarcoat it but... it's the truth: car loans are a mistake. In this episode, Nicole explains why and what you should do instead. See omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. After all that car talk last week, I got a few more auto questions,

like this one from Callie in Boston. Hey, Nicole. Thank you so much for the episodes about car shopping. I'm trying to buy a car right now, and I've really been struggling. So all that advice has been really helpful. And I wanted to hear your opinion on car loans. I think that I may take one out so that I could afford to get a newer car. What do you think? Thanks so much. The short answer, Kelly, I'd prefer it if you did not take out a car loan because you're borrowing to buy a depreciating asset. A depreciating asset

refers to stuff that's worth less as it gets older. This includes most goods like furniture, appliances, and cars. One exception would be a vintage Hermes handbag that defies my wildest dreams of appreciation, but more on that in future episodes. The bottom line, a cardinal sin of finance is borrowing for a depreciating asset. Let's say you borrow at 10% interest. That's more than average, but I'm rounding up for easy math to buy a $25,000 car. That means your monthly payment is more than 500 bucks. In five years, you've spent more than $30,000 for a car that's probably worth $7,500 by the time you sell it or trade it in. Can you tell me why this makes sense? Rather, can you tell yourself? Because I already

know it doesn't. And this only gets worse if you don't have a stellar credit rating, because your interest rate will then be higher, so more of your hard-earned cash will be blown out your exhaust pipe. All of that said, I know that right now is a particularly difficult time to buy a car, and if you didn't tune into the episodes last week, you may not know that I recently got into a car accident where my car was totaled, and so I just went through the whole process of buying a car myself, and it was very difficult. I actually paid over sticker price for the first time in my life. So if you're trying to buy a car right now, I feel for you. And I do understand that with current prices, taking out a loan may be absolutely necessary.

If that's your situation and you must take out a car loan, Please have at least 20% to put down in cash to shorten the length of your loan term to at least three years, which can save you from some of the rapid depreciation after that. Plus, you want to pay off your car as quickly as possible to avoid what could happen in the event of a bad accident. I mean, how much would it suck to keep making loan payments for a totaled car that you don't actually own? However, even if you do have that down payment, let me offer a little suggestion. Take that $5,000 or whatever the amount is and buy a used car. Save the $500 you would be spending on payments for 10 months and presto whammo, that's $5,000 more. At that point, you can upgrade to an even better used car or have more cash to

put down on a new car so that the loan will be a lot smaller. For today's tip, you can take straight to the bank, crunch the numbers, and see if it makes more sense for you to wait out this car price frenzy. If your current mode of transportation is Uber or Lyft or public transportation, I want you to do the math. See if you're actually spending more on Ubers than you would be spending on a year of car payments. I know that we assume that Ubering everywhere has a much lower ROI than just purchasing a car. And in normal times, I would say that's true, but we are not living in normal times. Timing makes all the difference in getting that sweet, sweet ROI. So see if it makes sense for your wallet to wait. Money Rehab is a production of iHeartRadio.

I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.