According to the IRS, the average tax refund paid out so far in 2023 is around $3,079. 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 use your tax refund to pay for a car

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 a few 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.

Be aware that by the tail end of your loan, you are usually not paying interest anymore, just the remaining principal. If you’re at that point, it may make financial sense to put your refund toward higher-interest debt instead, such as a student loan or credit card payment.

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.

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 and using 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.

Tips on using your tax refund wisely

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. A new car does not have to be “new.” Consider a less-expensive used vehicle to make the most of your refund. Your tax refund will stretch further, and you can borrow less.
  • 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 down the line.

The bottom line

For many Americans, tax season can be stressful. But if you take the time to plan, you can get the most out of your refund and maybe even drive off with a new car. And remember, taxes are due in mid-April. 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.