NEW YORK (
) -- You're ready for a new car, have decided to buy rather than
and now want to find the best loan. In today's conditions, should you go from a standard car loan from a dealer or bank, or look to a home-equity or margin loan?
Standard car loans are pretty attractive, ranging from about 3.2% for a 36-month deal to just under 4% for a 60-month loan, according to the
, But because home values have been rising, you may be able to get a home equity loan and perhaps deduct your interest payments from your federal income tax. (Talk to your tax expert.)>
The stock market has been rising, too, making a modest
from your broker less risky. (Margin interest payments are deductible only if the loan bought taxable investments, which doesn't include vehicles.)
So the first question is, do you itemize your federal tax return, and are you likely to for the life of your loan? If you don't -- and a majority of taxpayers do not -- the tax deduction for
interest doesn't apply to you. That means the interest rate you pay is your true, after-tax rate, and the average dealer or bank loan will probably be cheaper than the average home equity loan.
If you do itemize, your after-tax rate on the equity would be lower than the official loan rate. Suppose you paid 6% and had a 25% income tax rate. Then a quarter of your interest payment would come back to you through the deduction, making your after-tax rate 4.5%.
While that sounds good, keep in mind that your "tax bracket" really represents the rate on just the last portion of your income. The tax is progressive, meaning the first chunk of earnings is not taxed at all, while additional portions are taxed at ever-increasing rates until that top, or "marginal" rate, is reached. A person in the 25% tax bracket may well pay less than 20% once all this is taken into account.
One way to get a clearer picture of the tax deduction is to figure your total federal income tax as a percentage of your gross income. If the result were 15%, subtract 0.15 from 1 to get 0.85, and multiply that by your loan rate to figure your after-tax rate. That would give a 6% loan a 5.1% after-tax rate -- 0.85 x 6.