According towards the IRS, the average tax refund paid out in 2022 was around $2,815. This can make a major dent when it comes to purchasing a new car — or perhaps paying off your present auto loan. Should you expect a similarly sized refund, arrange for how you can best make the most of a few thousand extra in your wallet.
3 uses of your tax refund to pay for a car
There are a few methods for you to make the most of your tax refund to obtain on the highway. Based on your current finances, determine which route is the best for you and your wallet.
1. Pay down your current loan
Although this can mean no new car smell or group of wheels in your driveway, reducing your present loan could be a very financially smart decision. Use your tax refund to either make a few additional payments or pay the entire balance entirely. But before you utilize your refund to pay down the loan, check the small print on your loan agreement to prevent any potential early payment fees.
Be aware that through the tail end of the loan, you’re not often paying interest anymore, only the remaining principal. For that reason, it may make financial sense to place your refund to use elsewhere should you don’t have much of a balance left.
2. Create a down payment on the vehicle
The higher your deposit is in your vehicle, the low your monthly cost and the less interest you pays with time. It is recommended you have 20 percent of the vehicle’s value like a deposit, so using your tax refund to create a large deposit on a vehicle is a superb way to pay less overall.
A deposit calculator will help you see how much cash it can save you. However, this tactic is just effective by itself should you expect a sizable tax refund. Otherwise, you need to still make use of your trade-in and savings to cover the full 20 % down payment.
3. Lease a new vehicle
Leasing a vehicle allows people who want to get behind a newer, nicer vehicle to do this cheaper than buying. With more money available, you can pay more up front for that vehicle to your monthly cost.
But a payment in advance isn’t usually recommended on the leased vehicle if you don’t have to lower the payment per month. This is because the total cost is identical — and you’ll be out that money when the car gets totaled.
Although there are many perks to leasing — the newest technology, automotive abilities different vehicles — make sure to consider both benefits and drawbacks of leasing prior to signing off.
Tips on using your tax refund wisely
Consider these pointers after your return arrives in the mail or is deposited into your banking account.
- Don’t allow the dealer know about it. Even though it is exciting to get additional cash through the refund process, do not publicize it when at the lot. This could potentially throw away any opportunity for effective negotiation.
- Keep your financial allowance in mind. The extra money you have received will not last forever, so don’t get carried away and disregard any budget you normally follow. This is especially important when it comes to vehicle financing. Ensure you sign off on the loan that you can still afford as the months keep on.
- Don’t rush the procedure. If your new vehicle is within your future, figure out what vehicle you want and which financing option will save you money before tax season ends. That way when you receive your check, you won’t feel pressured to create a large financial decision on impulse.
- Consider buying used. A new car doesn’t have to become “new.” To help make the most out of your refund, consider a less expensive second hand vehicle. Your tax refund will stretch further, and you’ll be in a position to borrow less.
For most Americans, tax season could be stressful. But when you take the time to plan you will get the most from your refund and maybe even drive away with a new car. And remember, taxes are due in mid-April — around Memorial Day, which might give you a chance to land a much better deal.