Do people really buy new cars with their tax refunds?

Almost $3,000.

That’s the average refund for a U.S. taxpayer.

You may hear some suggest that $3,000 would make a nice down payment on a car. Or cover about five months of the average new-car payment or seven months for the average used-car payment.

But do people really buy cars with their tax refunds?

Tax refund car purchase
Millennials are apt to buy a car with a tax refund.

One piece of evidence is that nearly two-thirds of all refunds – an average of $2,873 last year – are back in the hands of taxpayers by the end of March. And that month was one of the two best of the year for new-vehicle sales eight of the last 10 years, reports the U.S. Bureau of Economic Analysis (BEA).

The end of March also happens to be the end of the first quarter, when salespeople and dealerships are trying to hit quarterly quotas and start building momentum after two lean months.

Coincidence?

Probably not, although it’s difficult to put a solid number to the impact.

Various surveys suggest that last year as much as 9 percent of 111.6 million taxpayers spent their refunds on major purchases, including new or used cars and homes, according to gobankingrates.com. That figure was even more for millennials, rising as high as 14 percent.

And an eBay Tax Refund Retail Study suggested that 37 percent of millennials planning to spend their refund have their hearts set on purchasing a vehicle.

“Car sales are a key driver of the U.S. economy, and the industry sees a big uptick every spring as consumers turn their tax refund into a deposit on a new or used car,” reported Axios news website. Indeed, March vehicle sales were second only to August in the first 11 months of 2019.

But should you buy a new car with your tax refund?

A lot can depend on how great your need is for a different vehicle – new or used – as well as other considerations, such as saving your refund, investing, retirement savings, spending on medical care or  paying off high-interest debt such as credit cards or other loans.

Meanwhile, keep in mind that for whatever incentives exist to buy in March, it usually is one of the least-discounted months of the year, according to Ronald Montoya at Edmunds.com.

Still, there’s the matter of that $3,000 refund sitting in your bank account and, perhaps, the best reason for buying another vehicle as soon as possible sitting in your driveway or garage.

For those inclined to spend, the average refund is enough to cover about half the 20 percent down payment recommended by financial experts on a $27,000-$30,000 new or used vehicle. Or at least enough to make a significant dent in a year’s worth of car payments.

That being said, you still probably have questions on how to use your tax refund.

If you do plan to spend your tax refund on a vehicle, the experts at Edmunds.com automotive website offer a half-dozen suggestions on how to use the money wisely:

  • A down payment on a new or used vehicle.

This reduces the loan amount and results in smaller monthly payments with less budget impact.

  • Fix or upgrade your current vehicle.

Keeping a recent-model-year vehicle well maintained could allow you to drive it more than 10 years and well past 100,000 or even 150,000 miles, based on industry data.

  • Buy a really inexpensive used vehicle.

With a bit of searching, an average refund could go a long way toward a low-priced used car, perhaps even that 20 percent (or more) down payment financial experts suggest.

  • Make a large drive-off payment on a new-car lease.

Apply a larger down payment to your lease to reduce the monthly amount and ongoing budget impact.

  • Pay down an existing car loan.

You may want to consider using your tax refund to pay down the balance on your existing vehicle loan or make several extra monthly payments so you are carrying less debt.

  • Refinance your current loan.

If your credit rating has improved since you took out your higher-interest vehicle loan, “you could use your tax refund as an opportunity to structure a better loan.”

“Remember that all the rules of smart car shopping still apply,” said Edmunds.com. “Only by planning ahead and applying sound advice to car buying can you make the most of your refund.”

A refund comes only once a year, but car payments continue monthly for years.

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