Edmunds: 5 smart ways to use your tax return on a car

Tax season will be coming to a close later than usual this year, due to the May 17 extended deadline. Until that time, you might hear advertisements from car dealerships urging you to bring in your refund or pandemic stimulus check to buy a new car. Given that the average tax refund issued in 2020 was $2,741, according to the IRS, it is a solid amount that people often use to make major purchases.

What’s the best way to spend extra cash from your stimulus money or tax refund if you do decide to apply it to your next or current vehicle? Edmunds’ experts have five suggestions.

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USE IT AS A DOWN PAYMENT

The ideal down payment is one that’s large enough to give you a comfortable monthly payment yet still allows you to keep some money in your emergency savings account. But this has been harder for many shoppers to do as vehicle prices have risen over the years. The extra cash from the tax refund or stimulus check can make for or bolster a good down payment.

A larger down payment does a number of things to help people in securing a car loan. First, it shows the lender how serious the buyer is about taking on a loan. It also reduces the likelihood of the buyer owing more on the loan than the car is worth. Most importantly, the reduction of the loan amount means a smaller payment to fit better into a buyer’s budget. That, in turn, makes it easier to get approved.

MAKE A LARGE DRIVE-OFF PAYMENT ON A LEASE

Normally, Edmunds recommends that you spend only the drive-off fees, usually the first month’s payment, registration and the startup fees, to begin a new lease. However, if you start your lease with a larger down payment, the monthly lease payments will be a lot lower. Not only are lower payments easier to manage, but if you want to extend the lease, you may be allowed to continue to pay this lower amount on a month-to-month basis. This strategy sets you up for more affordable payments and flexibility if you choose to extend the lease.

If you plan to do this, however, check your contract carefully to make sure it is allowed. Some leasing companies have different rules. And make sure your drive-off payment is protected by gap insurance in the event of an accident in the first few months of driving.

PAY DOWN AN EXISTING CAR LOAN

Some people might consider using their tax refund to knock down the balance on their existing loan so they are carrying less debt. There are two ways to do that: Make an extra payment or two, or pay down the balance. Making extra payments means you pay off the loan sooner. Paying down the balance will reduce the amount of interest paid over time. Call your lender to determine the best way to proceed if you want to go either of these routes.

REFINANCE YOUR CURRENT LOAN

Are you an unfortunate used-car buyer who’s been saddled with a 12% interest loan? By refinancing at today’s more competitive rates, you could potentially slash your monthly payments in half. If your car loan has a high interest rate, or you have improved your credit rating since you took out the loan, you could use your tax refund as an opportunity to structure a better loan. Use all or part of the refund to reduce the principal on the loan and get a better interest rate on the balance.

FIX OR UPGRADE YOUR CURRENT VEHICLE

A set of new tires can improve your vehicle’s ride quality, braking performance, quietness and even fuel economy. You can also treat your car to that major service that you’ve been putting off because it’s expensive. Inexpensive repairs that can go a long way to rekindling your pride of ownership include clearing foggy headlights, getting a thorough detail, and repairing interior rips and tears. Dent removal and paint touch-ups can often be done by a mobile service for just a few hundred dollars.

These fixes certainly don’t replace the thrill of owning a new car. They will, however, make driving your current car more enjoyable and will likely prolong its life, reducing your need to get a new car and saving you money down the road.

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EDMUNDS SAYS: One last piece of advice: Don’t simply walk on the car lot carrying your refund check, ready to be signed over. This will send the wrong message to the car salesperson, signaling that you are perhaps desperate and unprepared for the car buying experience. Only by planning ahead and applying sound advice to car buying can you make the most of your refund.