If you really need a new car, the "no tax on car loan interest" policy, making interest payments tax-deductible for personal vehicles, might sweeten the deal for you, but don't throw away dollars to get pennies.
Why it's often a bad move: Deductions reduce your taxable income by the interest paid but they don't come anywhere near justifying the cost of a new car. Suppose you finance a $40,000 car at 6 percent over 5 years, paying about $4,800 in interest annually (early on). If you're in the 22 percent tax bracket, you'd save roughly $1,056 in taxes per year. But you're still out $4,800 in interest, plus the car's principal, insurance, maintenance, and depreciation'which could total $10,000+ yearly. Net loss: thousands. Opportunity cost bites too, that money could grow in investments yielding 7-10 percent returns.
When it might be a good move: If you're already planning to buy a car for essential needs, the deduction could sweeten the deal, effectively lowering your borrowing cost. Think of it as a bonus.
Rick Good spent ten years in the newspaper business, including with The News & Observer (Raleigh, NC) and The Greenville News (Greenville, SC). He co-wrote, with Melinda Coleman, Rutledge to Riley: Governors of South Carolina, 1776–Present (Published by The Greenville News), and is the author of Mind Games Trivia #1 (Amazon). He has recently spent 15 years creating original trivia content through Sounds Good Mobile Entertainment and continues that with his new company, SGME Software. He edits The Smart Reader’s money, real estate, and business coverage.
