How To Use Your Tax Return To Pay For A Car | Bankrate (2024)

According to the IRS, the average tax refund paid out so far in 2024 is a little over $3,000. This can make a major dent in a car down payment or paying off your current auto loan. If you expect a similar amount, plan to take advantage of that money and use your tax refund to buy a car this year.

3 ways to get a car with your tax refund

There are a few ways you can fund a tax return car purchase. Depending on your current financial situation, determine which route is best for you and your wallet.

1. Pay down your current loan or buy out your lease

Although this will mean no new car smell, paying down your current loan can be a financially wise decision. Use your tax refund to make additional payments or pay the entire balance in full. But before you use your refund to pay down your loan, check the fine print on your loan agreement to avoid any potential early payment fees.

If you are currently leasing your vehicle, you could put your tax refund toward buying out your lease. If the car or truck has a higher value than the buyout cost and you want to keep driving it, this may be a good option to explore.

But your car loan or lease might not be your top financial priority. Compare the interest rates on your other debts with your car loan. If you have high-interest credit card debt, you will likely save more by paying it off rather than your car loan.

2. Make a down payment 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. Experts recommend paying 20 percent of the vehicle’s value as a down payment, so using your tax refund to make a large down payment on a vehicle is a great way to pay less overall.

A down payment calculator will help you see how much money you can save. If your refund isn’t large enough to cover the full 20 percent down payment, you should still use your trade-in and savings to make up the difference.

3. Lease a new vehicle

Leasing a vehicle allows those who want to get behind a newer, nicer vehicle to do so at a lower cost than buying. With more money available, you can pay more upfront for the vehicle to reduce your monthly cost. However, putting a down payment on a leased vehicle isn’t usually recommended unless you need to lower the monthly payment.

If you make a down payment, the overall cost of leasing doesn’t change — and you will be out that money if the car gets totaled.

One alternative to using your tax return as a down payment would be putting the money into a bank account. Use it to cover a few months of future lease payments when money is tight.

Although leasing offers many perks — the newest technology and the ability to drive different vehicles — consider both the benefits and drawbacks of leasing before signing off.

How to use your tax refund to buy a car: Top tips

Consider these tips after your tax refund arrives in the mail or your bank account.

• Don’t let the dealer know about it. Although receiving extra cash through the refund process is exciting, do not publicize it when at the lot. Revealing how much money you have can hurt your chances for effective negotiation.
• Keep your budget in mind. The additional money you have received will not last forever, so don’t get carried away and disregard any budget you typically follow. This is especially important when it comes to vehicle financing. Be sure you sign off on a loan you can still afford as the months pass.
• Don’t rush the process. If a new vehicle is in your future, determine what vehicle you want and which financing option will save you money before tax season ends. That way, once you receive your check, you won’t feel pressured to make a large financial decision on a whim.
• Consider buying used. Look at less-expensive used vehicles to make the most of your refund. You can calculate the difference in cost between a new and used vehicle to see how your tax refund can stretch further.
• Do your research. If you decide to buy used, request a vehicle history report and have the car inspected by a mechanic. These steps will help you uncover any past or ongoing problems with the car, which could save you serious money.

The bottom line

Taxes are due April 15. If you file by then, you’ll likely get your refund just before Memorial Day, which may give you a chance to land a better deal. By taking the time to plan, you can get the most out of your refund and maybe even drive off with a new car.