CARLA LAZZARESCHI : Dealer Financing May Be Best Way to Buy Car

Q: I am planning to buy a new car this year for about $15,000. Does it make more sense to pay cash for it or to finance it and invest my cash? Can I finance the car through a home equity loan, or should I go to my credit union, which will charge me 10.5% interest? My annual income is $35,000, and my only tax deduction is my mortgage. --J. G. F.

A: Since you apparently are lucky enough to have a choice of paying for your car all at once or financing it, let’s examine each of your alternatives carefully to determine how you can most effectively use your money.

But first let’s review a few facts about today’s consumer borrowing environment. To begin with, it is generally wise to avoid consumer debt as much as possible now because the tax deduction for it has been completely phased out. Other forms of debt, including mortgage interest, remain tax deductible, but borrowing money makes sense only if you have no alternatives, need the tax deduction or can earn more on your money by saving it than it will cost you to borrow.

With that understanding, let’s look at the credit union alternative. The 10.5% interest the credit union wants to charge is considerably higher than what your money would earn in even the most attractive savings or money market accounts, which are paying about 6% to 7% these days, or the equivalent of 4% or 5% on an after-tax basis to a single taxpayer in your income bracket. The interest to your credit union also would not be deductible.

While interest on home equity loans of up to $100,000 is fully tax deductible even if used for a consumer purchase, the loan fees will not be, and any points charged by the lender are deductible only over the life of the loan. A home equity loan, which is often called a second trust deed, will probably carry an interest rate of between 9% and 11%, with an after-tax equivalent for you of 6% to 7%. Based on this, our financial advisers say a home equity loan is too costly and involved for something as small as a $15,000 new-car purchase.

Now, let’s examine the all-cash alternative. Paying cash will save you the interest payments, but what are you giving up? As we said, in today’s market, investors can earn somewhere around 6% to 7% interest on the savings accounts and other insured deposits. After tax, that probably works out to something between 4% and 5% for you. And this is what you would be giving up if you pay all cash. (Of course, there are other investment opportunities--including real estate and securities--which could offer higher rates of return on your money. But for the purpose of this discussion, we’ll stick to investments with government insurance.)

But wait! There is an alternative you didn’t mention. What about those terrific financing deals some of the hard-strapped car manufacturers are offering these days as they try to push end-of-the-model-year cars off the showroom floors? At least one U.S. car maker is advertising rates of less than 3%. At that level, it might make sense to take a financing package and invest your money as best you can. Of course, the “cost” of these financing deals is a significantly reduced range of choices among automobile models. You are also likely to find that dealers are far less willing to negotiate with you over price. So before you accept a below-market-rate auto loan, do some comparative shopping and arithmetic to find out if you will have to pay more for a car with terrific manufacturer financing than you would for a model for which you pay all cash.

Again, the overall lesson is that when you have the choice between paying cash and taking credit, you should determine if your cash can earn you more--after taxes are deducted--than what you are paying for the privilege of paying on time. When you can find deals that allow you to use someone else’s money for a lower price than what your own money can earn, the advice is: jump.

No Need for Form to Do a Stock Transfer

Q: Recently you said that an easy way to sell virtually worthless stock without incurring selling expenses was to strike a deal with a friend or relative. Then you said to contact the stock transfer agent to have the stock registered in the name of the buyer and to obtain a Form 1099 for the seller to file with his income tax. I have done everything you advised, but the transfer agent says that they do not issue 1099 forms. What now? --B. C. A: Don’t worry if the transfer agent won’t issue a 1099 to confirm the transfer of shares. You can still document the sale for tax filing purposes with a simple statement signed by both buyer and seller outlining the pertinent details of the sale. Be sure to keep the paperwork from the sale, particularly any canceled checks, to support your statement. Technically speaking, you do not need a Form 1099 to file with your taxes. An honest reporting of the transaction, supported by the required evidence, should be sufficient.