We answer real money questions in NerdWallet’s Smart Money Podcast. The first part of this week’s show is a discussion about what consumers complain about most. This week, we’re going to be looking at the money question by Jim. I am a big fan of this podcast. Thank you for putting it together every week. […]

We answer real money questions in NerdWallet’s Smart Money Podcast.

The first part of this week’s show is a discussion about what consumers complain about most.

This week, we’re going to be looking at the money question by Jim.

I am a big fan of this podcast. Thank you for putting it together every week.

By 2023 I want to purchase a brand new vehicle. I have a question about car financing. The car I have is nearly 20 years old and the repair costs are becoming unaffordable. My car has been with me for so many years that I’ve had plenty of time to save up enough money for a new vehicle.

What is the best way to finance a car? Is it better to buy the vehicle in cash, or do you recommend financing the car over a period of 24 – 36 months based on the market and inflation conditions at the moment?

More background: I’m grateful for my 6-month emergency fund, and I contribute to both an IRA (individual retirement account) and 401(k). My credit is good and I think I could get a loan at 4% to 5%. Your advice would be appreciated on the cost-benefit of paying cash for a car compared to financing it and investing any remaining money into a brokerage.

Thanks, Jim”

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Episode Transcript

Liz Weston: Hey, Sean. You’ve had any problems with your credit history?

Sean Pyles: In my twenties, I found out that I had an account for collections on my report. It was from a college utility bill I didn’t pay. But that’s it. Liz, what about you?

Liz Weston, There might or may not be a library book unreturned that snowballed to a collection. It would be nice to blame someone else for this. It turns out that many consumers have issues with their credit report and are making loud complaints.

We’re glad you found us. Welcome to NerdWallet Smart Money, the podcast where we take your questions about money and answer them using our Nerds. I’m Liz Weston.

Sean Pyles, I am Sean Pyles. Remember to ask us money-related questions. You can pause this podcast to think for a moment. It’s controversial, I know. Stop the podcast and think about the money issue you’re having. You may feel like your budget is always too tight, and want to find ways to increase savings. Or you might have friends’ weddings approaching and want to know how you can make the cost more affordable.

Liz Weston: Yes. You can leave a message or send a text on our Nerd Hotline 901-730 6373. That’s 901-730-NERD. Email us by clicking [email protected]

Sean Pyles: Sara Rathner, my co-host in this episode of Money Question and I respond to a question from an audience member about buying a car in 2023. Liz Pyles: First, Liz, I’m going to discuss the most common complaint that consumers are having right now. It is about credit reporting agencies.

Liz Weston : The Consumer Financial Protection Bureau received three quarters of its complaints last year from consumers about credit reporting agencies. In 2022, the number of monthly complaints the CFPB receives nearly doubled compared to the previous year.

Sean Pyles: Yikes. It’s hard to tell if it makes me more worried or relieved that so many people have complained, but I do know that they know about the Consumer Financial Protection Bureau. It’s a government body that will take complaints. Let’s look at what is happening. Liz said that there were a number of complaints about credit reports, with the most frequent complaint being incorrect information in a credit file. This was about 38%.

The reports contained inaccurate negative information. It could be a credit account which did not belong to Liz, but still appeared on her report. A credit report that is misused, such as credit inquiries people don’t know about, can be a problem. This could indicate fraud if your information is being used to obtain a credit or loan. It could also be your current creditors who are checking out your credit. This is allowed and very common.

Liz Weston: Yeah. Some people are unable to identify the company that is checking their credit report because they don’t recognize the name. You should know the name of who is checking your report, and for what reason. This will ensure that your credit reports only contain legitimate credit inquiries. Some errors like an outdated address or a former employer don’t have any impact on your credit score, but an account marked as being late or in collections will.

Sean Pyles : This can make it more difficult or expensive for you to obtain a loan or rent an apartment, or to be insured.

Liz Weston: We also heard complaints from consumers about difficulties in placing or removing credit freezes. At NerdWallet, we love credit freezes because they offer a strong level of protection to prevent someone else opening fraudulent credit cards or accounts under your name. Credit freezes can be a bit tricky, just like anything else related to credit.

Sean Pyles: That also applies to the human aspect of things. If you want to get a new credit line, make sure you temporarily remove the freeze on your credit. You may be automatically refused a new credit line if you don’t do this. This is what happened to me.

Liz Weston : We had this conversation and it was the very first question I asked. Do you remember if your credit was frozen?

Sean Pyles: “Yes” It’s because I only applied for credit sparingly. It was almost forgotten I’d frozen my credit with all three bureaus. It’s not important. Consumers should regularly review all three credit reports to ensure that they are in good shape. For now, you can check your credit reports every week for free. Go straight to annualcreditreport.com. Google “credit report” and don’t click on it. Just go to annualcreditreport.com to make sure you’re not going to any scam sites.

Liz Weston: Yes. Lookalike websites.

Sean Pyles: Sean Pyles, yes. You can contest serious mistakes if you find them. If you have trouble getting a freeze on your credit or obtaining your report, contact the credit bureau directly. It may be necessary to send in proof of identity, such as a driver’s licence, but it will all be worth the effort.

Liz Weston: Yes. If you still have problems, contact the CFPB. They’re here to help.

Sean Pyles: Debt collection is another major source of complaints. Most common was the complaint of being chased by debt collectors for an unpaid debt. Consumers are protected by federal laws from such tactics and other potentially harassment debt collection practices. In our show notes, we’ll provide a resource link that will help you combat aggressive debt collectors.

Liz Weston: Credit cards rounded out the list of the three most common complaints from consumers, usually because they have a dispute with their credit card statement. There are laws that protect you and policies from the issuers. We’ll provide links to these in our show notes.

Sean Pyles: Lastly, the complaints against credit repair firms were at the bottom of the list. They accounted for only 2,000 of more than 1 million. The CFPB reported that this number almost doubled between 2021 and 2022. However, credit repair companies are not able to do much for you. NerdWallet has a lot of resources and articles that will help you clean up your credit.

Let’s move on with the money questions conversation I had with Sara Rathner, my co-host.

Jim sent us an e-mail with his money question. Spencer Tierney, a NerdWallet author, read out the question.

Spencer Tierney: This year, I want to purchase a brand new vehicle. I have a question about car financing. I have a car that is nearly 20 years old. It’s getting old and it won’t be worth it to repair it. My car has been with me for a long time, so I have built up enough savings to pay for the new car in full. I have a question: Given the high rate of inflation and the market conditions, is it better to finance a car or pay cash? More background: I am grateful for having a 6-month emergency fund, and I contribute to an IRA. My credit is good and I think I’ll be able to get a loan for a new car with an interest rate of 4%-5%. Your advice would be appreciated on the cost-benefit of paying cash for a car vs. the investment opportunity costs associated with financing it and investing the rest in an account at a broker. Jim, thank you.

Sara Rathner’s response: On this podcast episode, NerdWallet’s autos editor Shannon Bradley joins us to help answer Jim’s questions, and mine as well, since I’m in the same situation. Shannon, welcome to Smart Money.

Shannon Bradley Thank you for having me.

Sean Pyles Shannon, I’m so happy to have you in the podcast. Can you describe to us the state of the auto market today?

Shannon Bradley: It’s improving, but it is still far behind where we were three years prior to the pandemic. The car industry was thrown into chaos and many factories were closed. The factories reopened with a reduced production due to supply chain problems and a lack of semiconductors. The result of this was that there were fewer new cars and more used ones, which pushed prices up to records. In the beginning of this year both new and used car prices dropped, though only marginally. Although the average price of a new vehicle has dropped from $38,000 to $49,000, it is still higher than before. The average price of a new car has dropped, but it’s still nearly $49,000 compared to about $38,000 before the pandemic.

Sara Rathner Why are new cars so expensive?

Shannon Bradley: Even though the supply chain problems have subsided, auto production is still not back to normal. Cox Automotive, a data firm, reported in mid-March 2023 that the overall inventory of new cars was down by 53% from this time last year. New-car prices are high because supplies cannot meet the demand. Because they are unwilling to or cannot pay these higher prices, many consumers hold on to their vehicles longer. This contributes to a shortage of new cars and to high used car prices. All it comes down to is supply and demand.

Sara Rathner says that the state of the auto market could be described as a mess. This is an understatement. Then I want you to get out your crystal ball, find out where the tarot deck is and take a look at the future. When will we see car prices drop this year? You are asking for a friend.

Shannon Bradley : Although car prices have already dropped slightly from record levels this year, I do not expect a major drop anytime soon, if inventories remain tight.

Sara Rathner Why is this?

Shannon Bradley: This is the part where I would love to have a magic crystal ball, because so many things are at play. The limited stock of cars was further reduced by the fact that car sales had been up in early this year. The huge increase in sales that we usually see around tax time hasn’t occurred. Some consumers hesitate to buy a $50,000 vehicle because of the high interest rates and economic worries.

Sean Pyles Okay, I can understand that.

Shannon Bradley: A stagnant market could lead car makers to reduce prices. Many car manufacturers are currently making record profits even though they’re not at production levels of 2019. For nearly three years, they have not needed to provide rebates or financing. If one company decides to lower prices and other companies follow, then we may see the price drop faster than it is now.

Sean Pyles : It almost appears that automakers don’t care about making the market more friendly to people like us, who are looking for a new car.

Shannon Bradley No, not at this time.

Sean Pyles: All right. This is the situation that Jim, our listener, has to deal with as he considers different options to purchase a vehicle this year. Let’s start with Jim’s options for financing, and we’ll begin by discussing auto loans. This is something that Jim has considered. These loans will also be quite expensive, given how costly cars are at the moment. What should someone keep in mind if they’re looking for a loan to buy a new car?

Shannon Bradley: First of all, I would encourage them to take the time necessary to compare car loans and car models. This is one of the best things anyone can do. In today’s market, I believe that traditional advice on car buying is even more relevant.

Sean Pyles: Okay. What I’m saying is, I presume people are looking for the lowest-cost car loans they can get. How can people get this?

Shannon Bradley: The less money you spend on the vehicle and the finance the lower the interest rate you will pay. When you find a vehicle you love, you may be tempted to buy it immediately, particularly if there are limited inventories. Even when the car supply was tighter, people used price guides such as Edmunds and Kelley Blue Book to do their research online. The people used apps for car buying or listings from online retailers to find out what other people paid for the same model or similar models. They used this information to get a cheaper deal from a local dealer or buy the car outside of their region.

Sara Rathner: Let’s discuss interest rates, because it’s something else that has been on the news lately that is freaking out people. What has the Fed’s increase in interest rates done to auto loans?

Shannon Bradley: It’s driven auto loan rates up to their highest level since 2009. Edmunds.com reported that the average APR for a new car loan was 6.95% in February. The used car loan rate stood at 11.03 %. Remember that the average does not show everything. Consumers with excellent credit will likely pay a lower APR, while those with FICO scores of 600 and below could end up paying as much as 17%.

Sara Rathner: Oh my God. It’s the same as putting a car on credit at this stage.

Shannon Bradley: Yes.

Sean Pyles Oh yeah.

Sara Rathner : Let’s discuss a bit more the importance of shopping around when it comes to a loan for your car. I think that people don’t take this seriously enough. You may be tempted to accept the lowest effort option offered by the dealer because you are already at that location. However, this might not always be the best offer. How can you compare car loans?

Shannon Bradley: It’s true. Most people just want the car and to leave the dealer. They will take the first offer. Auto dealers earn money by arranging loans. They are not your friend when you’re trying to get the best rate. Get auto loan estimates and offers from other lenders like credit unions, banks or online lenders before you ever engage with a dealership. Never tell the dealer that you intend to pay in cash, as they might try to compensate for the lost revenue by increasing the price.

Sara Rathner, you know what? That’s something I did not know. In that case, they’ll try to push beyond the sticker.

Shannon Bradley: Yes. There are many situations like this where going into a dealership without preparation makes you an easy target for the tactics that dealers employ to improve their bottom-line.

Sean Pyles : When I see people posting on TikTok their stories about buying a car, many of them will have a line that says “market adjustment” which is a kind of upcharge due to the tight market. This seems ridiculous.

Sara Rathner: Yeah. You can say “I’m not going to pay this “?

Sean Pyles: Yes. Sean Pyles: Yeah.

Sara Rathner: Yes. The car was on sale in a dealer about 50 miles from our home, but we were still looking. They gave us a map and we said, “Alright.” Thank you, but not thanks. Then they immediately responded by knocking off $2,000 from the price. They kept calling us even though we didn’t want to purchase the car. They kept calling every time they changed the price of the car, even though it hadn’t yet sold. It made me worried that the car hadn’t sold.

Sean Pyles : What’s interesting about the auto market is that I was actually looking for a car hybrid earlier this year. Because they’re so pricey, I didn’t get one. The people working in these dealerships texted me nearly every day after I drove them. The people who have front-facing video cameras left me videos saying, “The prices has changed. Do you want to try it out again?” You want to purchase this vehicle? It’s getting desperate. It makes me believe that they are not selling as many cars despite the tight market.

Shannon Bradley: Yeah. It’s normal to see a boost around this time. Sales are slightly up, but still not at the same level as they would normally be. Dealers are concerned about being able move these cars. Sara, I believe you also mentioned that there was another dealership outside of your locality that you spoke to. Even a year before, when the inventory was tighter still, I found out that many car buyers didn’t only focus on local dealers. The car buyers used mobile apps and online marketplaces in order to find the exact same vehicle that was on their local dealership lot.

To be able bring some competition, they can go to the dealer and say “I found an identical car 100 miles away,” they may be able have it delivered or drive for it, but they will be in a position to gain more leverage.

Sean Pyles: Speaking of negotiating, getting prequalified and preapproved can help people to have a stronger hand. What do these terms mean? And how can people use them in their favor?

Shannon Bradley: Yes. Preapproval or auto loan prequalification are not the same thing. You may hear some lenders using these terms interchangeably. You can compare both rates and pre-qualification, but it’s more like sticking your toe into the water. It gives you an idea of what interest rates are available from different lenders. This is not something that you would take into the dealer because there is no guarantee. It can be a good way to find lenders who offer lower interest rates. Pre-qualified offers usually are based on soft credit checks, which won’t impact your score. It gives you the opportunity to compare rates and find out which lender has the best rate.

Sean Pyles: I got you. Next step is to get pre-approved. This is more serious. What do you mean?

Shannon Bradley: I think preapproved loans are more like wading into the waters. You would bring them to the dealership and they will give you a base rate that can be beaten. You must remember that preapprovals are based off of a credit check. This can temporarily affect your credit score. When applying to more than one lender for pre-approval, try to make the application within two weeks. Multiple credit inquiries are counted as just one.

Sara Rathner : Shopping around to find a mortgage.

Shannon Bradley: Yes.

Sara Rathner says that online car dealers have been popping up because the millennials don’t like to do things in person. What if you’re not buying at a conventional car dealership? You can still finance these types of purchases through a credit union or bank.

Shannon Bradley: In most cases, yes. Many people are unaware that online retailers will offer in-house finance, however, most will also accept credit from your bank or credit union. Don’t feel like you have to use the financing offered by an online retailer just because you bought from them. This is a great question to ask.

Sean Pyles, well our listener Jim also wonders about the opportunity cost of buying a vehicle with cash as opposed to investing this money. Shannon, how do you feel about that?

Shannon Bradley: First, I would like to commend Jim for his ability to buy a vehicle with cash while having an emergency fund as well as contributing to both his IRAs and 401ks. Jim claims that they are able to get an auto-loan rate around 5%. Based on what they have told me, that is doable. Jim would have to pay almost $4,000 of interest if he took out a $50,000 loan for a new car at 5% annual percentage rate. If Jim invested the $50,000 over three years at a rate of 6%, even without adding anything to the fund, it would reach nearly $60,000. They are now about $6,000 in the black.

Sean Pyles: Wow. This really shows the size of Jim’s bank account and the money people may need to get an auto loan. It’s mind-boggling to take out a $50,000 car loan. But that’s the current state of the auto market.

Sara Rathner: Yeah. It’s certainly not an expensive luxury car.

Shannon Bradley: Not necessarily. Jim’s investment and market will have a lot to do with the outcome.

Sara Rathner: Yeah. Jim also mentioned they have good credit. That can be to their benefit, as well.

Shannon Bradley: Yes. Shannon Bradley: Yes. They may have good credit if we do not know their score. If Jim’s credit is excellent, and he has explained his financial situation, it may be possible to qualify for a special financing offer at less than 5%. The 0% offers almost disappeared after the pandemic. Many people are unaware that these offers could come back. It seems that they are returning. Early March 2023 saw about 9,5% of all auto finance transactions at 0%. If Jim does not have a particular make or model in mind they can definitely look into special financing deals. A rate of less than 5% will be even more compelling to take out a loan for a vehicle and invest the money Jim has saved.

Sean Pyles : Shannon Do you have any last thoughts for people who will be shopping for cars in 2023?

Shannon Bradley: I’d also say that being flexible will make it easier to get a good deal on a vehicle. Jim may qualify for better financing if he doesn’t specify a specific make or model. We’re also seeing that the inventory reduction isn’t uniform across automakers. Some automakers have more stock than others. They may have higher production rates than other dealers, offer more rebates or special financing. If you are set on a specific model and make, be open to other options. You may find that a car that has similar features is available at a lower price.

Sean Pyles (to Sean Pyles): Okay. Shannon, thanks for your insight.

Shannon Bradley: You’re welcome. Thank you for inviting me.

Sean Pyles : Let’s move on to the tips we want you to remember. Sara, would you like to start the discussion?

Sara Rathner: Sure. No. 1. Make the most of a tough market. Prices for new cars and used vehicles are still high despite recent drops. Search around for a car you can afford.

Sean Pyles, next, be aware of your options for financing. Preapproval for a car loan is a good option if you can’t buy with cash. This will give you more leverage when negotiating.

Sara Rathner: Lastly, consider the potential trade-offs. You can avoid debt by buying a vehicle with cash, but investing that money could give you a higher return.

Sean Pyles, that’s all for today. Have you got a question about money? Call or text 901-730 6373 to ask the Nerds your money questions. That’s 901-730-NERD. You can also email us at [email protected] Visit nerdwallet.com/podcast for more info on this episode. Remember to rate, review and follow us wherever you get this podcast.

Sara Rathner : Here’s a brief disclaimer : we are neither financial nor investment advisors. The information provided here is for entertainment and educational purposes only and does not necessarily apply to you.

Sean Pyles: Liz Weston produced this episode with Tess Vigeland. Sara Rathner edited our episode and Kaely monahan mixed the audio. Thank you also to all the people at the NerdWallet Copy Desk for their assistance. With that in mind, I’ll say goodbye until the next time.