How to use your tax return to pay for a car


According to the IRS, the average tax refund paid in 2021 was around $2,815. This number can make a big dent when it comes to buying a new car – or even paying off your current car loan. As tax season approaches, plan how best to take advantage of your tax refund.

3 ways to use your tax refund to pay for a car

There are several ways to get the most out of your tax refund for hitting the road. Depending on your current financial situation, determine which route is best for you and your wallet.

1. Pay off your current loan

Although this means there will be no new car smell or wheel set in your driveway, repay your current loan can be a very smart decision financially. You can do this by using the extra money to make a few extra payments or to pay off the entire balance. But be aware that at the end of your loan, you generally pay no more interest, just the remaining capital. For this reason, it may make financial sense to use your refund elsewhere if you don’t have much balance left.

Before using your refund to pay off your loan, check the fine print of your loan agreement to avoid possible prepayment charges.

2. Make a deposit on a vehicle

The higher your down payment on your vehicle, the lower your monthly cost and the less interest you will pay over time. Using your tax refund to make a large down payment on a vehicle is a great way to pay off your loan sooner and lower the overall cost. Enjoy a down payment calculator to see how much money you can save.

3. Lease a new vehicle

Rent a vehicle is a great option for those who want to get behind a newer, nicer vehicle. With more money now at your disposal, you can pay more upfront for the vehicle at your monthly cost. But a down payment is generally not recommended on a leased vehicle unless you need to lower the monthly payment. This is because the overall cost is the same, and you will lose that money if the car is totaled.

While there are many benefits to leasing – latest technology, ability to drive different vehicles – be sure to consider both the advantages and disadvantages of leasing before signing.

Tips for using your tax refund wisely

Consider these tips after your return arrives in the mail or is deposited in your bank account.

  • Do not inform the dealer. While it’s exciting to receive extra money through the cashback process, it’s not recommended to advertise it when you’re at the dealership. This could potentially ruin any chance for effective negotiation.
  • Keep your budget in mind. The extra money you received won’t last forever, so don’t get carried away and ignore whatever budget you usually follow. This is especially important when it comes to vehicle financing. Be sure to sign a loan you can still afford Over the month.
  • Don’t rush the process. If a new vehicle is in your future, figure out which vehicle you want and which funding opportunity will save you money before the end of tax season. This way, once you receive your check, you won’t feel pressured to make an important financial decision on a whim.

Next steps

For most Americans, tax season can be stressful. But if you take the time to plan ahead, you can get the most out of your refund and maybe even walk away with a new car. And remember, taxes are due on April 18 – right around Memorial Day, which may give you a chance to get a better deal.


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