How to Spend Your Tax Refund on a Car

How to Spend Your Tax Refund on a Car

Tax season is a time a lot of Americans use to purchase something big. As an average federal tax refund check is around $3,000, this money often goes towards a big, life-changing purchase. And in a lot of cases, the item that gets bought is the car.

Using your tax refund to buy a car is a logical decision, most of all if your own vehicle is old and needs thorough repairs. You know it’s time to replace your car if the repairs cost more than half of what you’ve paid for the vehicle itself. However, if you’ve decided to spend your tax refund on a car, you still should do it the proper way. Let’s review a few tips that might help you.

Why You Should Buy a Car During the Tax Season

Tax season is a time period when taxpayers prepare their financial statements, submit and get their tax returns. When is tax time? It usually lasts from January 1 to around April 15. So, what makes it the best season to buy a car? Let’s take a closer look.

1. You Can Buy Car with Tax Refund

The first and the most obvious benefit is that you can use the check you get from the government to make a payment for the part of the car. There’s no need to save money for a long time just to make a down payment for a car you like.

This is especially helpful if you have a bad credit score. In this case, the down payment is usually higher and difficult to afford normally. However, you should make careful calculations and make sure that you can pay the car off after making the down payment.

2. There are Special Offers from Dealerships

Some specialists warn against buying cars during the tax season. The reason is that many people make such a purchase, which increases the demand for cars. Increased demand often results in an increase in prices, which is why it might not be the best idea to shop for cars during this time.

However, it is not always as cut and dry. Some dealerships and manufacturers create sales and special offers specifically during the tax season to attract more customers. This especially concerns newer dealerships that focus on promotional campaigns to attract more customers.

3. Better Used Car Selection

Multiple people in America spend their tax refunds for a car purchase. No matter whether they buy a new or used vehicle, they need to get rid of their old car. Some pass it down to their relatives or friends, but a lot of people choose to sell them to the dealership.

This means that there are many more used vehicles for you to choose from during the tax season. It also means a better choice of used cars in a good state and for a better price. All in all, this makes it a perfect time to purchase a vehicler that’s been in use.

4. Lower Interest Rates

Another reason why tax season is the best time to buy a car is that the dealerships offer the best tax refund car deals in terms of the down payment and interest. During this time, the interest rates are usually lower by 1-2%.

Once again, this is more helpful to people with lower credit scores. If you miscalculate and fall victim to the high-interest rate, that might make your credit score even lower and suck you into the debt hole even further.

Use Your Tax Money as a Down Payment for a Car

Whether you’re planning to buy a new or used car, if you use the tax refund as a down payment for the car, you show the lender that you’re trustworthy and your intentions are concrete. Making a bigger down payment can often result in having better interest later on.

Some car dealers even have special programs for clients that make a high enough down payment. So, if you plan on spending only a part of your tax refund on a car purchase, you should review the possible deals with the dealership of your choice and possibly reconsider.

Furthermore, vehicles lose around 15% of their value per year. This can often result in you paying more for your loan than the car is worth. But, if you make a high enough down payment, you can avoid spending too much paying each year and avoid depreciation.

However, before you make the car purchase with the tax return, make sure to make all the appropriate calculations and make sure you can make proper monthly payments after the down payment. People can sometimes get too excited about being able to make the down payment and forget to consider the consequences of not paying out the loan in full.

Tips for Buying Used Cars During the Tax Season

These tips can mostly be used if you plan to buy a used car throughout the year, but they will be especially helpful for you during the tax season:

  • Set your budget and choose the car accordingly – make sure you won’t spend all your savings just to pay out the loan, but also check if the vehicle is worth the price;
  • Buy from a trustworthy source – scammers know that tax season is the time people spend a lot of their money, so they target buyers with seemingly great offers to run off with the money. So, make sure you trust the seller before paying them anything;
  • Thoroughly check the documents – you need to know the vehicle history to make sure that no damage to the car has been hidden;
  • Try to negotiate – more often than not, the first price you hear from the used car seller is negotiable. Don’t be too greedy, but make the most out of the situation and get the best price possible;
  • Test drive the car – you cannot learn about car features unless you drive it. Most dealers will allow you to test the car on your own.

Frequently Asked Questions About Tax Refund on a Car

Should I buy a car during the tax season?

The answer is a resounding yes. Tax season is the best time to buy a car, especially if you find a good offer. There will be more options to choose from and more ways for you to save money on the purchase.

When’s the worst time to buy a car?

According to research, the worst time to buy a car is during June and July (16% fewer deals). This culminates during July 4th (18.6% fewer deals than average).

Are there taxes when buying a used car?

In most states, yes, there are sales taxes on used cars. Depending on the state, it can range from 3% to 8 % of the car’s value. However, there are some exceptions – states like Alaska, Delaware, New Hampshire, Oregon, and Montana do not have this tax.

Can I deduct a used car purchase on my taxes?

Unfortunately, no, you cannot deduct the sales tax on a used car purchase. The deduction is only available for a purchase of a new vehicle.