AI Stocks May Be in a Bubble, and Car Prices Could Rise Soon — Here’s What to Know

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14:26Sean Pyles:That's Q-U-I-N-C-E dot com slash smart money for free shipping and 365 day returns. Quince dot com slash smart money. We're back and answering your money questions to help you make smarter financial decisions. This episode's question comes from Vicky, who sent us an email. Here it is. I am 68 years old and I'm buying a used car for$26 ,955, putting$10 ,000 down. I'll pay it off and I fully retire in two years with my pension money. Is it smarter to take out a 60-month loan or 48 months? Thank you for your input and advice, Vicky.

15:00Elizabeth Ayoola:To help us answer Vicky's question, we are joined by our go-to car buying nerd, Shannon Bradley. Welcome back to Smart Money, Shannon. Thanks, Elizabeth. I'm glad to be back.

15:11Sean Pyles:Hey, Shannon. So I really like Vicky's question because it gets to all of the different variables that you have to consider when you're buying a car, like purchase price, how much to put down, what kind of loan term to get. Before we get into these different factors, though, I want to zoom out a little and hear about the state of the car market, because it's been pretty difficult over the past, say, five years. So has the car market stabilized at all or is it still as wacky as it was a year or two ago? It has been a challenging time for car buyers over the last five years. And you really have to go back to 2020 when COVID caused supply chain disruption, shortages of vehicles and car prices hit record highs.

15:51Then you had a couple of years of semiconductor chip shortages. So when we got into 2024, inventory levels seemed to be stabilizing. And at the end of the year, car prices had dropped slightly. So there was a little bit of hope there that things were starting to improve. But as we got into 2025, the prices really did not drop significantly. They did stabilize. they have been stable all year at about$48 ,000,$49 ,000, which is well above what they were five years ago. That$49 ,000 mark in July, Kelley Blue Book came out and said that is the average transaction price of a new car right now. So stable but high is the answer to that.

16:34Sean Pyles:That's rough.

16:35Elizabeth Ayoola:Wow, that is pretty expensive. When I bought my car about three years ago, I think I paid about $22 ,000 for it. So that's pretty high. So can you tell us what impact we're seeing from all of the tariff turmoil, if any at all? Well, at this point, it's interesting. Most auto industry experts from the beginning expected huge increases in new car prices. Like I said, prices have been stable. In the past month or so, a long list of car makers have released financials with billions of dollars and losses that they have attributed directly to tariffs. So it appears that the car makers have been absorbing a lot of these tariff costs.

17:18And you have to ask yourself, how long will they be willing to do that? Back to a lot of experts saying car prices are still going to go up if tariffs stay in places they are right now. Cox Automotive just said to anticipate an increase in new car prices of about 5 % to 8 % by the end of the year, especially when we start to see 2026 models come out.

17:42Sean Pyles:So it's not a great time to buy a car right now, but it may be a worse time to buy a car by the end of the year. Exactly. So let's take Vicky's situation piece by piece, starting with the purchase price. Nearly$27 ,000 for a used car to me seems steep, but then again, I haven't really been shopping for a car for about five years. I bought my car. It was three years old when I bought it. I bought it in 2020. It was a 2016 and it was just$19 ,000 and it had around 20 ,000 miles on it. So I think I got a pretty screaming deal on it. And maybe that's why I'm seeing$27 ,000 and thinking that is a lot more than I would want to pay.

18:17Sean Pyles:But does that number seem normal to you or is it maybe on the higher end? Unfortunately, it seems normal. I've had people recently tell me that they're going to buy a used car to avoid high car prices. And I think to myself, oh, you haven't been car shopping in a while, have you? We don't really know the age and condition of Vicki's car. But for comparison, I'll just say that Edmunds just came out with information that in the second quarter of this year, the average transaction price of a three-year-old used car was a little over$31 ,000. That's close to the record in 2022. Of course, that's an average.

18:58you can find a cheaper car with more miles. The advice that we always give people is just to make sure that you're not overpaying what the market price is right now. By checking online guides like, you know, Kelley Blue Book and Edmunds, you just have to do your research to know what is a fair price for a car in the market right now.

19:20Sean Pyles:Yeah. When I was shopping for my car a number of years back, I put together a little spreadsheet that listed the three cars that I was interested in, the annual repair cost, the reviews based on Edmunds and Kelly Blue Book, just to make sure I could aggregate everything in one place and make a really informed decision. So anyone who is looking to buy a car might want to do something similar to make sure they have all the information they might need at their fingertips.

19:41Elizabeth Ayoola:Yes, that's an excellent idea. And I want to add, when I was buying my car, and actually that was my first time buying a car, the car I have now was the first one I bought because in London, I was taking the train and bus all the time. But anywho, I negotiated, which was very scary but saved me some money. So with the economy right now, Shannon, do shoppers have room to negotiate the price of their cars? I was talking with our producer recently about how when she went to buy a car, the dealership basically told her, here's what we'll sell you this car for and you can take it or leave it. So is that how it is nowadays, Shannon?

20:13It really depends on where and what you're buying. The producer you're talking about was buying a Tesla and they kind of have a policy against negotiating. It's the same way if you're buying a used car online with Carvana or CarMax. They typically will not negotiate. And with inventory at dealerships being tied over the past several years, they've been less willing to negotiate. It's especially true of three-year-old used cars because they've been in low supply and high demand. But I will say for new cars in the last several months, there have been some indicators. the fact may be shifting a little bit.

20:51We were talking about people paying an average transaction price of around$49 ,000 for a new car right now. But Kelly Blue Book came out with the average MSRP or list price, which is what the automakers recommend a dealer charge for a new car at around $51 ,000. So there's a several thousand dollar difference there. There apparently are some people out there not paying list price. The other thing that we're seeing is that incentives and low rate financing has increased in the last month or so for people with good credit. And for a period of time, that was just non-existent. So that's an indicator that car dealerships, you know, in some cases are willing to sweeten the deal.

21:37And then I think the final thing I would say, If you want to negotiate, a lot has to do with timing in the vehicle itself. Buying at the end of the month or at the end of the year when car dealers are trying to hit quotas, you may be a little more successful. If you're buying a new car, buying when the new model years are coming out. You know, buying the previous year model when dealers are trying to clear those off the lot. That may be a better time to negotiate.

22:03Sean Pyles:Let's turn to the down payment. This is a really important part of car buying. Some dealerships will say that you can put nothing down, but that will mean that you end up paying a lot more in interest over the life of your car loan. Our listener, Vicky, put down over 35 % for their car, which seems pretty steep to me. Are there general rules of thumbs that folks should think about or be aware of around how much they should put down? And does this change if you're buying new or used? Yes, down payment is important. And as you said, a lot of dealers will say, oh, you don't need a down payment. But the less that you finance, obviously, the less interest you're going to pay overall.

22:39And sometimes financing less will also score you a lower interest rate. So that helps even more. So we usually recommend that a person should try to put 20 % down on a new car and 10 % down of the purchase price on a used car. That's purchase price of both. Realistically, looking at car prices right now, that is difficult for many people to do. And we recognize that. So, you know, we just say put down as much as you can. If you can't do the 20%, the 10%, anything you can put down is going to be better than nothing. you know, put it down without draining your savings, without draining your emergency account.

23:20Looking at Vicki, it doesn't look like Vicki, you know, had a hard time hitting those goals that we have for how much to put down.

23:30Sean Pyles:Yep. They've gone above and beyond. Above and beyond. And that's very commendable.

23:34Elizabeth Ayoola:All right. So we're going to shimmy onto the loan term, which is really what Vicki is wondering about. So Vicki, thank you for your patience as we finally get to the crux of your question. They're debating between a 60-month loan term or a 48-month term, even though they're planning to pay off the loan in a couple years once they retire. Shannon, is one loan term smarter than the other? We recommend that car buyers try to keep loan terms to no more than 60 months for a new car and 36 months for a used car. Again, that can be difficult for people with car prices so high because that does affect their payment.

24:12The main thing, I think, is to be knowledgeable about when you choose a long term, how that is going to affect what you pay overall. Because so many times people are just looking at that monthly payment without realizing the total cost. Shorter long terms increase your payment, but you'll pay less interest overall. Longer long terms are just the opposite. it. You're going to have a lower payment, and that makes it attractive to many people, but you'll pay more overall.

24:43Sean Pyles:So Shannon, what might this look like for Vicky? Can you give us some numbers to see how maybe 48 versus 60 months might look for her? We don't know what interest rate Vicky is paying, but I'm going to assume for a used car, a good credit, about 9 % APR. I did run the numbers with what Vicky had given us. If she went with a 48-month term, the monthly payment would be around$420 with$3 ,300 in total interest over the full four years of the loan. But Vicki's paying off the loan in two years, so interest won't have as long to accrue. And in that case, the total interest cost would be about$2 ,400.

25:25So if you compare that to a 60-month term, the payment would be about$350, total interest to$4 ,200 over five years. Paying it off early would drop that total interest to around$2 ,600. While we advise to go with the shortest term possible to cut interest costs, I think Vicki's situation is just a little different because they're paying the loan off in two years. That cuts the end of the loan off and there is less time for the interest to accumulate. So 48 months versus 60 months only saves about$200 in total interest.

26:02Sean Pyles:Yeah, which is not a lot. $200 is$200, but it's not a huge amount. It would be a lot bigger if they were going the full term of the loan. Yeah. So the question kind of comes down to how much Vicki can comfortably afford at the moment each month for their car payment and how much they really care about the amount of interest that they pay. Some people hate paying interest, so they want to minimize it as much as possible. But then given that they're planning to pay off the loan in a couple of years anyway, they might be fine with that lower monthly payment, even if it means that they're paying around$200 more in interest in the short term, which I think is pretty negligible.

26:36Sean Pyles:What do you think, Shannon? Yeah, I'd say the better choice depends on Vicky's current financial situation heading into retirement. Vicky's retiring in two years. That$420 payment is doable. Then why not go with 48 months and save$200. I'm always up for saving$200. But if a$350 payment would provide more breathing room in Vicki's budget over the next two years, a 60-month term won't increase interest costs by a huge amount. So I think those are really the two factors that Vicki needs to weigh in making that decision. And the whole conversation around paying interest on a car loan has changed a little bit recently with the passage of the Big Beautiful Bill.

27:19Sean Pyles:Folks can deduct up to$10 ,000 in interest on their car loan for qualifying vehicles. Now, this only applies to new vehicles, so Vicky is out of luck here, unfortunately. But Shannon, is there anything else that folks are in the market for a new car should keep in mind as they try to take advantage of this? Yes. That's one thing that when this came out as part of the Big Beautiful Bill, I think a lot of people looked at, okay, there's a$10 ,000 auto interest tax deduction, and they see that$10 ,000 number and that sounds really great. And we do have an article about this on our site. So it lays out all of the requirements to qualify for this tax deduction.

27:58As you said, you know, the car has to have final assembly in the United States. It has to be new. It can't be a lease. You have to be the original owner of the car. If you refinance, that it'll still, your interest will still be deductible, but you're the second owner of a car. This will not apply to you. And then the other thing is that it phases out the higher your income is. One of the things that I've heard is that Cox Automotive has said that you would have to buy a vehicle of$120 ,000 or more to realize the full benefit of this interest deduction.

28:36Sean Pyles:Wow. And if you're paying that much for a car, I'm betting that$10 ,000 isn't a huge sum to you.

28:42Elizabeth Ayoola:That's absolutely right. Well, on that note, since many of us are financing cars, we haven't talked about how to finance the car. Our listener is planning on taking out a loan for their car, then paying it off with money from their pension. And in the past, we recommended that people come to the dealership with a loan pre-approval to give them more leverage when they're negotiating. Is that still the best practice? What should people know? So we still recommend pre-qualification and pre-approval. And there are several things that people need to know there. Pre-qualification with a soft credit check.

29:15That's a way to see if you might qualify for a loan, how much you might qualify for, at what rate, without affecting your credit scores. but it really is just an estimate because the lender is basing it on less information about you since they haven't done a hard credit fall. Those numbers can change. They're less of a commitment from the lender. Pre-approval usually requires a hard credit inquiry which will cause a slight and temporary drop in your credit scores. It's because the lender knows more about you. It is more of a commitment. It's less likely to change. And, you know, we do recommend that car buyers get pre-approvals to take if they're buying at a dealership because they can take that pre-approval in and say, hey, here's the low rate I found somewhere else.

30:03Can you beat this rate? So it's a good way to, you know, get the lowest rate possible. Two things I do want to mention. I have found that many lenders use the terms pre-qualification and pre-approval interchangeably. So it's always a good idea just to say, hey, if I submit this application, will I have a hard credit inquiry? Because if you're just kind of shopping around, you're not sure if you want to buy a car, the last thing you want is a surprise hard credit inquiry on your credit report. The other thing is that getting career approvals, try to do that within a two-week time span, because if you do that, then it will only count as one inquiry on your credit report.

30:48Sean Pyles:That's smart. Okay. So one thing I'm thinking about in this entire conversation is the fact that Vicki's planning to pay off their car in two years. So does that change the calculus with all of the factors that we've considered so far? And paying off this loan shouldn't be an issue for them, right? There shouldn't be an issue with paying the loan off early. Vicki might want to ask the lender if it charges a prepayment penalty, but that really is not a common practice anymore for auto lenders. I have not found one in a long time that has a prepayment penalty. One thing I might question is the use of the pension to pay off the loan.

31:27We don't know anything about Vicki's pension or tax situation. And even if I did, I am not a tax expert. But if they haven't done it, it might be a good idea to talk to a tax advisor to understand the implications of any taxes or loss of investment income, and whether using that pension is the best way to pay off the loan.

31:51Sean Pyles:Yeah, that's great advice. And anytime folks are planning for a major life change, like maybe getting married or moving somewhere or retiring, it's a smart idea to talk with a financial planner of some sort so they can give you an understanding of all the variables at play and how you might want to best allocate your finances.

32:05Elizabeth Ayoola:That's right. Shannon, I have learned so much and I'm sure the listeners have too. Do you have any final thoughts you want to leave our listeners with? Yes. I think, you know, given the topic today and everything we've talked about, I'd remind people that an auto loan calculator is your best friend and NerdWallet has a great one on our website. If you have questions about loan terms like Vicki, the calculator will let you run different scenarios based on the purchase price of the car, your down payment amount, various rates at different terms. So you can see the overall effect that will have on not only your monthly payment, but the total cost that you're going to end up paying for the vehicle.

32:49You know, so using those tools along with the other things we've talked about, pre-qualification and pre-approval so that you can shop rates, using online guides to see how much you should be paying for a car. These things have always been important, but I personally feel that they're more important now when car prices are so high and there really isn't any indication that they're going to start falling anytime soon. All right.

33:18Sean Pyles:Well, Shannon, thank you so much for coming on and sharing your insights with us. Well, thanks for having me back.

33:22Elizabeth Ayoola:I always enjoy being here. And that's all we have for this episode. Remember, listener, that we're here to answer your money questions. So turn to the nerds and call or text us your questions at 901-730-6373, 901-730-NERD. You can also send us an email at podcast at nerdwallet.com.

33:42Sean Pyles:Join us next time to hear about whether using your phone to pay can lead to overspending. Spoiler alert, it can. Follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes.

33:56Elizabeth Ayoola:And your favorite brief disclaimer, we are not your financial or investment advisors. This nerdy information is provided for general educational and entertainment purposes, and it might not apply to your specific circumstances.

34:08Sean Pyles:This episode was produced by Tess Vigeland and Anna Helhosky. Hilary Georgie helped with editing. Nick Harissimi mixed our audio. And a big thank you to NerdVolet's editors for all their help.

34:17Elizabeth Ayoola:And on that note, until next time, turn to the nerds.

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