Should You Use Your Tax Refund to Buy a New Car?


car tax

It’s difficult working at a car dealership in January and February. After a busy holiday season of spending far too much money on gifts, parties, travel and other festive expenses, people are focused on paying down debts, tightening their belts and cutting back. That tends to leave little to no room to buy a new car.

All dealerships really have to do, however, is make it through to tax season, which really kicks into gear from March as the pace of filing builds before the dreaded April 15 deadline. Why is tax season such a boon for new car dealerships? Two words: Tax Refund. Of the millions of refunds issued to about 75 percent of tax filers, many put the money to work for them in the automotive realm. In today’s blog, we’ll be exploring the idea of spending your tax refund on a new car, whether it’s a good idea or not, and how you might maximize any benefit you get from spending it on a new car.

car tax in California

How Much is the Average IRS Tax Refund?

In 2020, the average refund from the IRS was $2,549 according to CNBC news. This was actually $321 less than the average received in the previous year. In 2021 at the time of writing, the amount had climbed back up to $2,873, but not all refunds have been recorded yet. There were about 126 million refunds issued in 2020, covering about 74 percent of all tax filers.

According to research done by Harris Interactive, about 1 in 3 vehicle owners usually intends to spend their refund money on car-related expenses. Among that 33 percent of vehicle owners, about 1 in 4 will use it as part of a deal for a new car. The question, then: is it a good idea to spend your tax refund on a new car? Is it an important-enough expense on which to use money garnered from the IRS? In an age when getting money back from the government is like getting blood from a stone, aren’t there better ways of using such money?

Should You Spend It On A New Car?

Actually, the case for spending your tax refund on a car is very strong. There are many plus points and reasons to do so. The main factor is that this tax refund money should always be viewed as “bonus money” and not regular income. Money that comes to you as a bonus can be used on things that are not necessarily a sound investment. As a continuously depreciating asset, a car is one such investment.

If you don’t use it for a car, you might use it on something like a vacation, which is nice and just as much of a non-returning investment financially as a car. However, at least with a car you get some long-term use out of it. When it comes to spending your tax refund on a car, however, the key thing is to do it smartly. In the next section, we’ll give you some smarter ways to spend your tax refund on car-related expenses.

Ways to Spend Your Refund on a New Car

You don’t have to take your IRS refund straight down to the dealership to buy a brand-new car. First, consider some of the following extra ways you might use that money to make your car-buying experience more effective.

Invest in Car History Reports

First, consider using the money or some of the money at least on researching your target vehicle, especially if you’re opting for a used car. The tax refund would likely be a perfect down payment on a pre-owned car, and might even be enough to buy it outright depending on who you buy from (see more on these topics below). One great way to spend a little bit of the money, however, is on getting a proper car history report.

car  sale in San Diego

A single Carfax report will cost you $39.99, and a single report from AutoCheck will cost $24.99. They are quite similar in their content, except that Carfax also offers their signature buyback guarantee if something goes really wrong. AutoCheck, however, is much more affordable when it comes to getting multiple reports. Where Carfax will charge you $59.99 for a mere six reports, AutoCheck charges $49.99 for 25 reports.

Price$39.99 for one report $59.99 for three reports$24.99 for one report $49.99 for 25 reports
Buyback protectionYesYes

In any event, it’s a small amount of your potentially $2,500 or more refund to learn more about the car you are interested in buying.

Look to Private Sellers

Another consideration when using your tax refund to buy a car is to use a private seller rather than a dealership. Private sellers on platforms like Craigslist are very motivated to sell quickly, and often have much more room to negotiate since they aren’t usually trying to maintain any profit margin on the vehicle. Your tax refund might just be enough to buy an older vehicle outright on such a platform.

Obviously, there are pitfalls, too. Some of your refund you’ll want to spend on a car history report (mentioned above), but also on an independent inspection of the vehicle by a qualified mechanic. That means a bit of additional expense, but the car itself is fairly cheap, and if it’s in good condition, it can last for many years and will be cheap to insure.

Consider, then, looking to private sellers first for a real bargain that could actually see your tax refund pay for either the lion’s share of a car, or possibly the entire thing. It’s certainly something for those to consider who receive a refund far above the annual average of $2,500-2,800.

Use the Refund as a Down Payment

Another good way to use the refund payment is as a down payment on a new car. It’s unlikely that your refund will be enough to purchase an entirely new car. Those receiving refunds as much as $15,000-20,000 might not want to buy the kinds of cars that budget could buy anyway. What it will do, however, is typically offer either a huge portion or the entire sum of a down payment.

The best policy is to do your best to stick to the 20:4:10 rule when it comes to buying a new car. If your tax refund can cover a 20 percent down payment on a new car, and the repayments over 4 years won’t amount to 10 percent of your gross income (including insurance), then it’s a great deal. If you have some cash savings and you are in genuine need of a new vehicle, then it would be okay to use the refund as merely part of that down payment.

The refund as down payment works even better if you also have a trade-in vehicle to help sweeten the deal further. It could mean that a smaller down payment is acceptable to get great finance terms on a new car. Of course, you could also still consider a used car and use the refund as a down payment on that. In fact, the odds that your refund will cover the down payment on a used car are much better.

Spending Tax Refund Money on Your Existing Car

As we mentioned earlier, about 1 in 3 car owners say they are going to spend their refund money on their cars. For the majority of those, they are looking to spend the money on their existing car. Is this a good idea? It really depends on the condition of the vehicle and on what exactly they intend to spend the refund.

First, it’s a good idea to spend the refund money on crucial repairs and maintenance that will prevent the car from slipping further into disrepair. If an owner has been putting off crucial maintenance like tire rotation, oil and filter changes, or a transmission repair, then a bonus lump sum of cash is a great way to get that work done and keep your existing car in good condition.

Second, it’s also a good idea to use refund money to pay down existing financing debt on your car if you need to. Missing car payments can result in negative changes to your credit score and your financing conditions, especially if you initially got the car on a zero-percent APR deal. Having the money available to make monthly payments, or cover insurance costs that frees up other money for monthly payments, is always a good thing.

Finally, in the absence of other debts or money worries, you might also use your refund to repair or modify an older car. In most cases, however, this isn’t the best use of the money. If you have an older car in disrepair, then using a valuable tax refund to repair it may be pointless. It would be far more worthwhile to invest in something new that will last longer than to use this money on a wing and a prayer saving an older one.

car buying in California

Conclusion: Consider Your Options Carefully

The fact is that you don’t know for sure if you’ll get a refund every year. Furthermore, you can’t ever be 100-percent sure on how much any refund would be if you do get one. It’s not a sum of money that you should really be counting on year after year, but this is actually part of what makes it such a suitable lump sum to use for a new car.

A new car isn’t something you typically need urgently, and your tax refund isn’t money that you should apply to any essential monthly or annual expense that you have. Just imagine you didn’t get a refund, what would you do if you were relying on it to cover some critical expense? Therefore, using it for a car is a great idea because even if you don’t get it, you can wait until next year with the car you have. It’s not the end of the world.

Regardless of how you end up using your tax refund, make sure you consider your options carefully before you do use it. This is doubly true and doubly important for those thinking about using the refund for auto-related expenses, including buying a new car. If you’re considering buying a car, then you can rely on CarBevy and its name your own price model to connect you with its network of trustworthy local car dealerships.

Learn more by getting in touch with us today.

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