Tax season is here. This means that car dealerships are capitalizing on the moment by encouraging consumers to exchange their tax refund checks for new car payments. It’s not a bad idea to use your tax refund to buy a car. If you’re considering it, make sure that you know the best ways to use a refund when buying a new or used car. According to a GoBankingRates survey, around 9% of tax refund recipients intend to use their refunds to pay for major purchases like a car, so you won’t be alone.
About the Average Federal Tax Refund
The Internal Revenue Service (IRS) confirms that most Americans receive a tax refund of around $3,000. This is a nice amount of cash, and if you’re thinking about spending it on a car, make sure that you’re spending it in the best possible way. Keep in mind that your tax refund is withheld money that the government is giving back to you.
If you’re getting money back, then you overpaid. However, most people don’t add their refunds into their monthly budgets because they don’t know if they’ll get money back. It’s easy to look at this money as extra funds that you can spend on something that you normally wouldn’t, but maybe it would be better to use it to pay for a needed item such as a car. In this situation, be sure to use your tax refund in a healthy way for your personal finances.
Save Some of Your Refund
Don’t spend your full tax refund on a vehicle. Keep at least 10% of the amount that you get back to cover additional expenses. Put it in a savings account to cover additional fees like a pre-purchase inspection or sales tax. You should always get an inspection on a vehicle before you buy a car unless you’re buying it from a car dealership that is offering a certified pre-owned warranty. If your tax refund is an average one, then putting 10% aside to cover expenses will leave you around $2,500 for your car.
Use Your Tax Refund to Put Money Down on a New or a Used Vehicle
A nice-sized down payment will help you qualify for an auto loan or a vehicle lease. This is especially important for those who have a low credit rating. If you use your tax return to put money down, then you’ll gain access to financial options that wouldn’t be available otherwise.
Putting $2,000 or $3,000 down on a car is proof to a lender that you are serious about paying for the vehicle. It also decreases the chances of you being in an upside-down loan situation. A large down payment decreases the total amount of your car loan, which means that your monthly car payment will be smaller and easier for you to manage. This also makes it more likely to gain lender approval because they know that it will be easier for you to pay.
When it comes to purchasing a vehicle, the general expectation is to put down 10%. If you’re getting a new car, then the percentage that most buyers usually put down is higher because new vehicles have a higher cost of depreciation. Financial companies generally require the buyer to cover this depreciation.
Use Your Tax Refund to Get Started With a Lease
If you’re considering a lease, then car experts advise putting down around $1,000 toward the lease agreement. If you can enter into a lease agreement by putting more money down, then you’ll lower your monthly payment amount; this will make it easier to include your new car payment into your monthly budget. Putting money down on a lease may also make it possible for you to extend your lease, giving you more flexibility. When entering a lease agreement, check the loan details because each company operates differently. This means that extending the lease may or may not be a possibility.
Don’t Use Your Tax Refund for a Higher-Priced Vehicle
If you’ve been planning a vehicle purchase for a while without knowing how much your refund will be, don’t use the money to purchase a higher-priced vehicle if your check winds up being larger than you expected. Along with this, it might be tempting to use the money to add luxury features to a vehicle that you’ve had your eye on. Your refund might give you the impression that you can afford a bigger car payment than what would actually be more comfortable in your budget. Keep in mind that your refund is just one influx of cash while a car payment is required every month for several years.
When considering a new or a used car payment, don’t count on receiving an annual tax return. You never know what will change during the year that could prevent you from receiving money back. In fact, a year may come when you’ll end up owing money instead of getting a check. Make sure that you’re comfortable with the car payment without receiving this money next year and the year after that.
Be Patient and Wait for the Check
If you’re planning to buy a new or a used car with your tax refund check, it’s easy to get excited and start shopping at car dealerships as soon as you’ve calculated the amount of your refund. Be patient and wait until the government agency has sent you the check. Sometimes, people make calculation errors and are owed less than they thought. The IRS will catch this mistake and send you less. Waiting gives you more time to find the right car.
Make a Big Payment on a Current Car Loan
If you currently have a car payment, consider using your tax refund to pay it down; that way, you’ll owe less debt. You can put some or all of your refund toward the full balance that you owe for a car or make one or two additional payments. When you make extra payments, you’ll be in the position of paying the car debt off more quickly than what’s scheduled. This saves you money in the long run because it decreases the overall accrual of interest. Before making an additional payment, reach out to your lender to make sure that this is the right move.
Invest in Your Current Car
If you maintain your current vehicle, then you can likely drive it past 150,000 miles on the odometer. It’s also a lot cheaper to maintain your current car than it is to buy a different one. So, what’s the best way to invest in the car that you already have? Mechanics recommend investing in a complete tune-up. This increases your vehicle’s fuel economy and helps it run better to extend its life span.
Consider getting your vehicle detailed and have any exterior or interior damage repaired. For instance, have dents removed and touch up the paint. If there are any rips or tears in the interior material, have them fixed. Invest in new floor mats.
This can make the interior look almost new. When your car looks nice, you’ll feel proud driving it. These types of updates can usually be completed for $200 to $300, making them highly affordable.
Refinance an Existing Car Loan
If you weren’t in the best financial spot when you first acquired a car loan, you probably didn’t wind up with the best interest rate. You may be able to use your tax refund to refinance this existing loan into one with a lower interest rate. This is a move that could decrease your monthly payment by half, making it easier for you to pay the loan off early. It could even have the added advantage of increasing your credit rating.
Use Your Tax Money Wisely
Buying a new or a used car is a wise way to use your tax refund if you need a better vehicle. Owning a reliable vehicle is almost priceless since you won’t have to worry about getting to the places you need to go. If you do spend your money to get a car, make sure you can afford it from month to month. The last thing you need is to put yourself into a poor financial situation.
When you head to the car lot, do so with your refund check in the bank. Don’t go with your check in hand, ready to give it to the dealership. This could make you look desperate. It might also hurt the negotiation process since the salesperson will know how much money you have.
A smarter way to get a car is to decide if it makes the most sense for you to buy something new or used or lease a car. With careful contemplation, you can use your tax refund to make financial progress.