Frugal Friends Podcast – Episode: Is it OK to Have a Car Payment? & How To Avoid an Auto Loan

Release Date: May 9, 2025
Hosts: Jen Smith & Jill Sirianni
Produced by iHeartPodcasts

Introduction

In this insightful episode of the Frugal Friends Podcast, hosts Jen Smith and Jill Sirianni delve into the nuanced topic of car payments and auto loans. Replaying a popular episode from a few years prior, Jen and Jill share their personal experiences with auto loans, offering listeners valuable perspectives on managing transportation costs without falling into debt traps.

When an Auto Loan Is a Bad Idea

Understanding Affordability
Jen emphasizes the importance of assessing whether you can truly afford the car you're eyeing. "If you absolutely know this is not going to be a car that is within my lifestyle way of affording things, then don't go with that one," she advises (09:39).

High Interest Rates and Long-Term Loans
Jill highlights that high interest rates can make auto loans financially burdensome. "Interest rates are much higher than they used to be," she notes, suggesting that loans under 5% are preferable to avoid overpaying in interest (12:16). Additionally, lengthy loan terms (beyond five years) can lead to paying significantly more over time due to accumulated interest.

Total Cost of Ownership
Both hosts stress the importance of considering the total cost of owning a vehicle, not just the monthly payment. This includes expenses like gas, insurance, registration, and maintenance. "You need to be looking at the total cost of the car, not just the monthly," Jen reiterates (12:40).

When an Auto Loan Might Be a Good Idea

Building Credit
Jen briefly touches on the idea of using auto loans to diversify credit history, though she expresses some hesitation. "Do not take out an auto loan for the credit portion of it. Take it out because you want to have that money allocated for something else," she advises (17:55).

Strategic Down Payments
Jill suggests that making a substantial down payment can reduce the amount borrowed, thereby lowering the overall interest and making the loan more manageable. "Putting a decent amount of cash down reduces the amount of the loan that you have to take out," she explains (18:08).

Financing Deals
Jen mentions that taking advantage of promotional financing deals, especially for new cars, can be beneficial. "If you have the cash reserves but need them for something else besides putting them all into a car, that's a smart move," she states (23:15).

Tips on How to Avoid Auto Loan Debt

1. Do Thorough Research

   • Compare Prices and Specs: Jill emphasizes researching different dealerships and comparing prices across the board. "Compare specs and pricing... know what you can expect to pay," she advises (30:35).
   • Use Resources Like TrueCar: Jen recommends using tools like TrueCar to understand dealer fees and negotiate effectively. "There are dealers with transparent pricing where you don't have to deal with hidden fees," she shares (31:49).

2. Secure Pre-Approval

   • Explore Financing Options: Jen highlights the advantage of getting pre-approved for a loan through credit unions, which often offer better rates. "Credit unions will be offering the best terms for a car," she explains (33:48).

3. Opt for Used or Certified Pre-Owned Cars

   • Minimize Depreciation Impact: Buying a used car can help avoid the steep depreciation associated with new cars. "Buy a certified pre-owned car that feels brand new without the high price tag," Jill recommends (34:22).

4. Limit Loan Terms

   • Shorter Loan Durations: Jen advises keeping loan terms to three or four years to minimize interest payments. "Avoid loan terms that exceed five years," she states (35:24).

5. Plan for Early Repayment

   • Pay Off Loans Quickly: Jill suggests strategies like making lump-sum payments or refinancing to pay off loans faster if possible (36:10).

Personal Stories and Experiences

Jen’s Negotiation Challenge
Jen shares a personal anecdote about nearly falling into the sunk cost bias while negotiating for a van she desired. After spending an hour and a half negotiating, she realized she was about to pay $4,000 more than an almost identical alternative. Recognizing the bias, she decided to walk away, saving herself a substantial sum (45:54). This experience underscores the importance of self-awareness and seeking objective opinions during major financial decisions.

Jill’s Advocacy for Research
Jill recounts her own journey from purchasing vehicles with cash to navigating the complexities of auto loans. She emphasizes the necessity of thorough research and understanding specific vehicle histories to avoid costly mistakes (55:08).

Key Takeaways and Conclusions

• Assess Affordability: Ensure that both the monthly payments and the overall cost of owning a car fit within your financial lifestyle.

• Prioritize Total Cost: Look beyond monthly payments to include all associated expenses of vehicle ownership.

• Research Extensively: Utilize online resources and tools to compare prices, fees, and vehicle histories to make informed decisions.

• Consider Financing Wisely: Opt for pre-approved loans from credit unions and aim for shorter loan terms to minimize interest payments.

• Be Aware of Psychological Biases: Recognize tendencies like sunk cost bias that can lead to overspending and make decisions based on complete financial analysis rather than emotions.

Jen and Jill conclude by reiterating the importance of personalized financial decisions, acknowledging that what works for one individual may not suit another. They encourage listeners to remain flexible and creative in their financial strategies, ensuring that transportation choices align with broader financial goals.

Notable Quotes:

• Jen: "If you absolutely know this is not going to be a car that is within my lifestyle way of affording things, then don't go with that one." (09:39)

• Jill: "Interest rates are much higher than they used to be. So this has become a kind of loan where you do want to focus on paying it off fairly quickly." (12:16)

• Jen: "You need to be looking at the total cost of the car, not just the monthly." (12:40)

• Jill: "Compare specs and pricing... know what you can expect to pay." (30:35)

• Jen: "Credit unions will be offering the best terms for a car." (33:48)

• Jill: "Putting a decent amount of cash down reduces the amount of the loan that you have to take out." (18:08)

• Jen: "Avoid loan terms that exceed five years." (35:24)

• Jen: "I'm so confident in the chapters I wrote in the book. Buying it will help me afford to live another year." (05:45)

Final Thoughts

This episode serves as a comprehensive guide for anyone contemplating an auto loan or seeking to avoid unnecessary car-related debt. Through a blend of personal experiences, expert advice, and actionable tips, Jen and Jill equip listeners with the knowledge to make informed and financially sound decisions regarding their transportation needs.

For more insights on personal finance, debt management, and frugality, subscribe to the Frugal Friends Podcast on your favorite podcast platform.