Is Using Your Tax Refund as a Down Payment on a Car a Good Idea?

Tax season is upon us again and if you have filed your taxes and happen to have a nice refund coming, then there’s a myriad of things you can do with it. You can save it, invest it, or if you’re in the market for a car, then you can use it toward a down payment. But is that really a good idea?

Making a down payment with your tax refund

A potential unhappy car buyer at a dealership.
Potential car buyer | Getty Images

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Considering you can do anything with that nice chunk of money that you’re getting back from Uncle Sam, it’s a good idea to use it toward a down payment on a car. After all, that’s money that’s technically not coming out of your personal stash in your savings, so why not throw it at the cost of a car that you want? If you need more reassurance, then you can think of it as a “worthy investment toward your personal needs of transportation,” or whatever frame of mind that helps justify your cause.

On a more serious note, using your tax refund toward a down payment can effectively help you pay off the car sooner and avoid more interest charges. You can either use the refund as your whole down payment or simply add it to a down payment that you have already saved up for. You can also use it as a stipend to cover a few of the monthly car payments instead. Whichever way you choose to use the refund during a car purchase, it will be beneficial.

Using your tax refund on an existing car loan is beneficial as well

A couple checks out a car in a dealership
A couple checks out a car in a dealership. | MYCHELE DANIAU/AFP via Getty Images

While using your tax refund to buy a car is a good idea, you can also use it on an existing car loan. If you’re currently paying off your car, here are a few ideas on how to spend your refund, according to Car Connection:

  • Pay down or pay off the existing loan
  • Invest in maintenance or repairs that your current car needs (tires, brakes, etc.)
  • Use the refund for car upgrades or modifications
  • Use the refund to purchase an extended warranty for your car
  • Use the refund to purchase GAP insurance

Using your tax refund can help if you have poor credit

A Ford dealership.
A Ford dealership. | Francis Dean/Deanpictures

If you’re looking to purchase a new or used car but have poor credit, then using your tax refund can give your situation a nice boost. Lenders require buyers in poor credit situations to fork over a down payment when buying a car in order to lessen the liability during the loan term. Most of the time, a down payment of at least $1,000 or 10% of the car’s price is needed and a tax refund can help you get to that amount.

No matter how you plan on using your tax refund — whether you want to save it or spend it – it’s not a bad idea toward the cost of a car. After all, cars do cost a healthy sum of money, so why not throw an extra chunk of change toward it? You may be glad that you did later on.

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