Most new and used car dealerships across the country look forward to tax season. Vehicle sales are sluggish in January and February as consumers tighten their belts and focus on paying off holiday bills, but all of that changes when the Internal Revenue Service starts sending out income tax refund checks. According to the market research firm Harris Interactive, one in three vehicle owners plan to spend some or all of their tax refund checks on their car, truck or SUV, and nearly a quarter of them will be trading in their current vehicles for a new or used car.
The Average Income Tax Refund
According to figures released by the IRS, the average income tax refund in 2019 was $3,163, and about 75% of the nation’s taxpayers received a check. If you receive a tax refund, you should remember that you are getting back money that was deducted from your paycheck. This is your money, and you can use it however you like.
You could spend this money on something you want like a new or used car, or you could save it or use it to pay down high-interest obligations like credit card debts. If you decide to get a vehicle, you will have further decisions to make. Should you buy or lease? Should you pay cash for an inexpensive used car or use your refund check to make a down payment on a newer vehicle? Or should you use the money to repair or improve your current vehicle?
Use Some of Your Tax Refund on Research
If you plan to use your income tax refund to buy a vehicle, you should put some of the money aside to cover expenses related to the purchase. Not all used cars are in it for the long haul or as well maintained as they should have been.
You should obtain a report that contains any details about accidents the car or truck has been involved in and any maintenance issues it has had. Also consider paying to have the car thoroughly inspected by a professional to uncover defects or problems that may not be immediately apparent. This is important because not all accidents are reported to insurance companies, which means vehicle history reports may not tell the whole story.
You can avoid these expenses and put the money toward the cost of a vehicle if you visit a used car dealer that provides Carfax reports and performs comprehensive inspections on the vehicles they sell. Some even offer a money-back guarantee.
Buying an Inexpensive Car from a Private Seller
Buying an inexpensive vehicle definitely has its advantages. If you choose this option, you will not have to worry about making loan payments, and you will not be required to purchase comprehensive auto insurance. Older vehicles will also attract less attention than a newer car, which could be something to consider if you would prefer to keep a low profile.
However, taking this path also has its fair share of pitfalls. Older vehicles tend to break down at the worst possible moment, and their lack of advanced security features could make them more attractive to thieves. Safety features are another consideration. An inexpensive used car may only have one or two airbags instead of five or six, and it could be lacking potentially life-saving technology like traction control.
While buying an inexpensive used car may save you money in the short term, it could end up costing you almost as much as a newer, more reliable, and safer car in the long run.
Using Your Tax Refund to Put Money Down on a Car
Most people who put their income tax refund checks toward a vehicle purchase use the money to increase the size of their down payments. Putting more money down lowers monthly payments and makes getting approved easier, and people with lower loan balances are less likely to find themselves owing more than their car is worth when they decide to trade up. A larger down payment could also make banks less inclined to ask for a cosigner, which may make it easier to obtain credit in the future.
Should You Buy New or Used?
If you have decided to apply your income tax refund toward the purchase of a car, next you will have to decide between a new or used car. There is nothing quite like the feeling that getting behind the wheel of a brand-new car gives, but that feeling comes with strings attached. A new car starts to depreciate the minute you drive it off the lot, and it will lose about 10% of its value in just the first month of ownership. After a year of driving, you can expect a new car to be worth about 80% of its original value, and that assumes that it is properly maintained and not involved in any accidents.
Buying a used car may not provide the same initial thrill as a new vehicle but knowing that somebody else has paid the depreciation bill can be just as satisfying. Purchasing a used car from a reputable dealer that inspects and stands behind its vehicles can also eliminate most of the risks associated with buying preowned.
To Lease or Not to Lease?
A new vehicle lease can look like an attractive option to somebody with a tax refund check in their pocket and a vacancy on their driveway. The average tax refund should be enough to cover just about all of a lease’s up-front costs, and the monthly payments may be no higher than they would be on a used car loan.
Leases look great going in, but they often lose their luster when the time comes to return the vehicle. People who buy vehicles have an asset that is worth money and can be traded in, but people who lease do not own their vehicles and sometimes face bills for excess mileage and wear and tear when they turn in their cars. They are also required to carry more insurance, cannot modify their vehicles and may find it difficult and expensive to get out of their leases early.
Spend Your Money Wisely
Choosing to use your tax refund to buy a new or used car can be a smart decision, but there are pitfalls you should avoid. You should remember that the tax code is frequently changed, which means that there is no guarantee that you will get another refund check next year or the year after. You should also resist the temptation to use your refund to get a more expensive car than you can comfortably afford.
Instead of rushing into a car dealer as soon as you get your refund check, put the money in the bank and then do some homework. Weigh the pros and cons of the vehicles you are considering, and then take them on test drives. Remember that you will be making payments on the car you pick for several years, so choose a dealer that is more interested in earning a customer than making a sale.