Debunking TikTok Financial Advice
Instead of going to TikTok for financial advice, consumers should consult their tax professional or financial advisor.
In recent years, social media has seen a rise in self-proclaimed experts providing financial advice on everything from stock market hacks to get-rich-quick schemes. A Forbes Advisor survey conducted by market researcher Prolific found that 79% of people in the millennial and Generation Z age groups have listened to financial advice on social media.
The automotive world hasn't escaped this trend. Car-financing tips have also cropped up on multiple social platforms, including video-sharing app TikTok. Here are three myths popularized on TikTok relating to vehicle financing.
Myth 1: You Don't Need to Pay Taxes on Your Car
According to one TikTok financial video, car buyers who are savvy enough to navigate the complexities of state business laws can avoid taxes on their vehicle purchases altogether. This could be misleading — any vehicle purchase made through a limited-liability company (LLC) needs to be recorded as a business expense for that LLC and used explicitly for business purposes.
Additionally, state laws determine what types of purchases made by an LLC qualify as a tax-free business expense. Not every state allows for a vehicle to be purchased tax-free by LLCs.
Not only is creating an LLC a time-intensive endeavor, if you create it for the sole purpose of buying a car without paying tax on the purchase, you may open yourself up to state or federal tax evasion or avoidance. This can have serious legal or tax consequences, including potential audit by the IRS, civil fines, or even jail time for criminal tax evasion. Additionally, it could result in the voiding of your insurance policy.
Furthermore, an LLC needs to show legitimate business income, expenditures, and so on, just as any business would. Unless a vehicle purchase is truly intended for business, this possible LLC loophole is likely not a good idea. You should consult a tax professional to determine if this is a viable option based on your circumstances.
Myth 2: Car Buyers Should Never Take Out a Loan
In a video from another finance-focused TikToker, car buyers are advised to make no-loan vehicle purchases by paying cash. While this method would allow buyers to avoid loan payments, it's not financially feasible for many people, particularly when discussing luxury cars. The messaging from this TikTok video could also discourage first-time buyers who are seeking auto loans.
Paying for a vehicle outright can cost tens of thousands of dollars upfront as opposed to making a down payment at the time of purchase and then making recurring monthly loan payments based on the term of the loan. If you are able to receive approval for financing, based on your credit score and history, taking out a loan could make buying a car more attainable. That said, taking out a loan on a car with an interest rate will also mean that you pay more for the car over time than if you paid in cash upfront.
Myth 3: Anyone Can Get Pre-Approved for a Car Loan
In a third financial-advice TikTok video, car buyers are encouraged to apply for pre-approvals before going to a dealer. That aspect of the video's advice is sound. Typically, you can complete a pre-approval request online before setting foot inside a dealership.
The video's advice becomes misleading, however, when it names three lenders specifically and claims they will offer fast pre-approval to anyone who reaches out. Pre-approval for financing depends on a variety of factors, including your credit history and score, and is not a guarantee.
Not everyone who asks will receive a pre-approved financing offer. Pre-approval also doesn't guarantee financing with the lender. Typically, you must submit a hard credit application to determine if you will ultimately receive approval for your auto financing.
Although pre-approval can be a helpful tool for starting the process to secure financing for a car purchase, it isn't something lenders can provide for every shopper.