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How to Use Your Income Tax Return to Buy a Car

How to Use Your Income Tax Return to Buy a Car

Are you hoping to buy a new or used car with your tax refund this year?

The average American receives $3,079 in income tax refunds, which can cover a large chunk of a vehicle down payment.

Whether you want to purchase or lease a car, truck or SUV, read on for tips directly from a former dealer.

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Use Your Income Tax Return for a Vehicle Down Payment

Most experts suggest making a sizable 20% down payment when possible, as it can help lower interest rates and monthly payments.

For a $20,000 car, aim for around $4,000 as a deposit. Even lessees benefit from bigger down payments through reduced monthly fees.

Key Benefits of Using Tax Refund for Auto Purchase

  • Qualify for better loan terms with larger down payment
  • Lower monthly costs free up cash for other expenses
  • Shorten finance periods to save on interest fees
  • Chance to buy upgraded model with extra savings

Should I Buy New or Used With My Tax Refund?

While new model-year vehicles offer the latest features and technology, used vehicles make better financial sense.

With the average tax refund, you can likely find reliable used cars priced under $15,000.

As always, have a used car inspected first and run a vehicle history report.

Tips for Buying Used Cars With Tax Refund

  • Research prices for desired used models
  • Check dealership-certified pre-owned inventory
  • Negotiate a fair price and financing terms
  • Use a refund for the purchase price or down payment

What’s Better – Buying or Leasing My Next Car?

You own the vehicle at the end of the loan termNo ownership – you return the vehicle after the lease ends
Higher upfront costs, but no monthly payments once paid offLower upfront payment, but need to pay monthly fees entire term
Can customize & modify vehicle freelyModifications prohibited without hefty fees
Equity – vehicle’s value belongs to youNo equity earned since you don’t retain ownership
Typically cheaper long-term ownership costs than leasing the same car over many yearsBetter if wanting to swap cars frequently or limit mileage

Both options are viable ways to acquire your next vehicle. Leasing makes more fiscal sense for drivers wanting to upgrade frequently.

Paying Off an Existing Auto Loan

Another savvy way to leverage tax refund cash is paying down a current car loan’s principal balance. This cuts interest fees and speeds up the payoff timeline. Consider making one extra monthly payment or a lump sum contribution if permitted by the lender without early repayment penalties.

Beyond a different car, utilize extra tax refund cash on:

  • New tires for better mpg
  • Brake system flush
  • Audio system upgrade
  • Comfier seat cushions
  • Paint protection film
  • Remote car starter
  • All weather floor mats

Key Takeaways

  1. Average tax refunds allow for sizable auto down payments
  2. Weigh pros and cons of buying vs. leasing next vehicle
  3. Pay off existing auto loans quicker to save money
  4. Consider used vehicles to stretch tax refund dollars
  5. Use leftover cash for repairs, tires or upgrades

With proper planning and budgeting, your tax refund check can serve as an excellent catalyst towards acquiring your next new or pre-owned car, truck or SUV.

Sources For This Article

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Picture of Steve Momot - Author

Steve Momot - Author

Steve, a seasoned expert in the automotive industry, formerly held a car dealer license in Florida. With extensive experience spanning across car trading and mechanical work, he founded Autohitch. His mission? To guide both buyers and sellers through the intricate maze of car purchasing, ensuring a seamless and informed experience. Outside of the automotive world, Steve has a passion for fishing and capturing the beauty of nature through photography.


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