Should I Use a Tax Refund to Buy a New Car?

In 2022, US taxpayers received an average refund of just over $3,100, according to the IRS. While that amount can’t buy you a new car outright, it can be put toward a down payment for a new vehicle, which would help to make monthly payments on a car loan more affordable. While we don’t know what the average refund will be this year, it’s safe to assume that it will be on par with last year, as that’s been the average over the past few years. 

So, should you use your tax refund to buy a new car? Before you cash your refund check and run out to the dealership, it’s important to weigh your options and plan accordingly so that you can make the best financial decision. Read on for some helpful advice.

Consider Your Options

There are two different ways that you can put your tax refund toward a new car. The options include:

Make a Down Payment

The more you put down on a car, the less you’ll need to take out on a loan and the lower your interest rate will be. In other words, a bigger down payment = lower monthly payments. According to financial experts, a down payment that equates to 20 percent of a car’s value is ideal. Therefore, using your tax refund so that you can make a bigger down payment can definitely help you get a lower price on a new vehicle. 

If your refund isn’t enough to make a full 20 percent down payment, if you currently own a car, the trade-in value could help to make up the difference. Of course, you can also combine your tax refund with any money you have saved up to use as a down payment on a new vehicle as well.

Lease a New Car

Rather than buying a new car outright, you could consider using your income tax refund to lease a new car. Typically, leasing ends up being more economical than buying. Just like a down payment on a new car purchase, the more money you put down on a leased vehicle upfront, the lower the monthly cost will be.

It is important to note, however, that putting more money down will reduce your monthly payment, but it won’t change the total cost of the lease, overall. That said, it is an option if you want to get behind the wheel of a new car for a lower monthly price.

Smart Ways to Use Your Tax Refund

Once you’ve decided whether buying or leasing is the right option for you, here are a few tips to keep in mind when your tax refund arrives before you head to the dealership.

Keep it a secret. 

Don’t let the dealer know that you have a wad of cash at your disposal. Remember that when it comes to car shopping, negotiating is highly recommended. If you let the dealer know that you have several thousand dollars on hand, you could end up hurting your chances of negotiating and getting a better deal on your new car purchase or lease.

Remember your budget. 

Always keep your budget at the forefront of your mind. If you let money cloud your thinking, you could end up making a decision that you will seriously regret.

Consider pre-owned. 

A new car doesn’t necessarily have to be brand new. Pre-owned vehicles – especially certified pre-owned vehicles – are often just as nice as brand-new cars. Not to mention, used cars are a lot less expensive. Going this route could help you save a big chunk of change on monthly payments.

Should you buy or lease a car with your tax refund?

If you’re planning on using your tax refund to buy or lease a new car, be sure to think ahead, don’t rush, and be smart about your spending. With careful consideration, you can put your refund to good use.