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How to use your tax refund to purchase a car

Man sitting at table filling out tax form
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According to the IRS the average tax refund paid out in 2021 was around $2,815. This number can make a major dent when it comes to buying a new car — or even paying off your current auto loan. As tax season approaches, plan for how you can best take advantage of your tax refund.  

3 ways to use your tax refund to pay for a car  

There are a few ways you can make the most of your tax refund to get on the road. Depending on your current financial situation, determine which route is best for you and your wallet.  

1. Pay down your current loan    

Although this will mean no new car smell or set of wheels in your driveway, paying down your current loan can be a very financially wise decision. You can do this by using the additional money to either make a few additional payments or pay the entire balance in full. But be aware that by the tail end of your loan, you’re usually not paying interest anymore, just the remaining principal. For that reason, it may make financial sense to put your refund to use elsewhere if you don’t have much of a balance left. 

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. 

2. Make a down payment on a vehicle  

The higher your down payment is on your vehicle, the lower your monthly cost and the less interest you’ll pay over time. Using your tax refund to make a large down payment on a vehicle is a great way to pay off your loan sooner and have it cost less overall. Take advantage of a down payment calculator to see how much money you can save. 

3. Lease a new vehicle    

Leasing a vehicle is a great option for those who want to get behind a newer, nicer vehicle. With more money now at your disposal, you can pay more up front for the vehicle to your monthly cost. But a down payment isn’t usually recommended on a leased vehicle unless you need to lower the monthly payment. This is because the cost overall is the same, and you’ll be out that money if the car gets totaled. 

Although there are many perks to leasing — newest technology, ability to drive different vehicles — be sure to consider both the benefits and drawbacks of leasing before signing off.  

Tips on using your tax refund wisely  

Consider these tips after your return arrives in the mail or is deposited into your bank account. 

  • Don’t let the dealer know about it. Although it is exciting to receive some extra cash through the refund process, it is not recommended to publicize it when at the dealer lot. This could potentially throw away any chance 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 that you can still afford as the months carry on.  
  • 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.  

Next steps  

For most Americans, tax season can be stressful. But if you take the time to plan ahead you can get the most out of your refund, and maybe even drive off with a new car. And remember, taxes are due April 18 — right around Memorial Day, which may give you a chance to land a better deal. 

Written by
Rebecca Betterton
Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to purchase a car.
Edited by
Auto loans editor