Myths About New Cars

Hug your kids at home, but belt them in the car.
~Author Unknown

This article is one of a 3 part series. After reading this article, you may also wish to consider the “Buying a New Car Can Cost You Millions” or the “How Used to Buy” articles.

The New Car Conspiracy

Myth: Financing is cheaper on newer cars. As low as 0%!!

Truth: If you pay cash, you will almost always get a discount. The 0% is just a marketing gimmick. Not only that, but the depreciation in the first year will more than make up for the interest rate.

Myth: I want a new car for the warranty. A used car is just buying someone else’s repairs.

Truth: With the money saved by buying a used car, you can often completely rebuild a car (often several times) and still come out ahead. Not only that, but many used cars are still under warranty and have already had the bugs worked out of them.

Myth: Everyone has a car payment.

Truth: The average millionaire doesn’t.

The average car payment is over $300/month. If you invested that money from age 25, you could have millions of dollars! Buying a New Car Can Cost You millions!!

Myth: I can deduct the interest from my taxes.

Myth: Leasing a new car gives a tax advantage for my business.

Truth: According to Dave Ramsey’s “Total Money Makeover” leasing works out to  an equivalent interest rate of around 14%!! I’ve seen credit cards that offer a better rate than that. Leasing is more like renting:

  • Penalties charge for going over alloted miles
  • Excessive wear and tear fees for any dent or scratch (sounds like losing damage deposit)

So after paying all that money to “rent” your car, you can pay the dealership even more money to give it back.

In fact, the average dealership makes well over 13 times as much profit on leasing than if the car had been bought with cash. The dealership makes 7 times as much profit financing it when compared to the same deal as a cash purchase. Unless you want to help out the dealership, leasing is the most expensive way to own a vehicle.

WAIT?! What about the tax saving for leasing a new car?

OK, say you are paying $400 per month on your lease. That’s $4,800 per year. If the vehicle was only used for 100% business then you could claim that whole amount. The taxes on that $4,800 would have been around $1,200-$1,500. So you are sending the dealership $4800 to save $1,500 on taxes. Not smart. Not only that, most people will use their car for personal use at least sometimes, and hence couldn’t honestly claim that much off anyway.

This example compares the tax differences between a vehicle lease write-off of $5,000 ($416/month) to paying taxes on that $5,000 and driving a car paid with cash. Although this says finance/lease deductions, it applies more to leasing. The financing deductions would typically be only on the interest paid, hence significantly less. The following table was calculated using the personal 2010 tax brackets, but similar losses can be expected under most taxing systems.

Why don’t you save money? Most tax deductions don’t subtract from what you owe the government, but rather subtract from your “taxable income”. Hence if you spend money to save on taxes, you will ALWAYS come out behind.

A better bet? Buy the same car, but one year old and pay cash. A car that costs $30,000 new can often be bought for around $20,000 used, and you can still write off a mileage or a straight line depreciation deduction on your taxes. That’s a real tax savings!

BUT I WANT THE NEW CAR SCENT!

Buy a $30,000 car one year later for $23,000. Most cars still smell pretty new after one year. That $7,000 in savings will let you get it professionally cleaned and detailed (about $250) 28 times. That’s once a month for over 2 years! It will be like driving a new car each month. If you think $7,000 in cleaning to keep that new car scent is too much, than you probably can see the logic behind spending $7,000 to “buy” the scent once.


Conclusion – Buy Your Next Vehicle Used

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