Why it’s not too soon to decide whether to use your tax refund on a vehicle

Yes, tax season still is about two months away.

And you probably would rather think about the holidays between now and then.

But that doesn’t necessarily mean it’s too soon to start figuring out how (or whether) to use an anticipated refund to purchase a new or used vehicle instead of holiday gifts.

Especially if you think you’ll want to spend it on a good yearend deal before your refund is in hand.


Of course, you don’t want to spend the money on a vehicle if you have other, more pressing needs, or your budget can’t absorb the ongoing monthly payments.

But the average refund of $2,700 – closer to $3,000 for early filers – may be awfully tempting.


Right now is the best time of year to shop for a used car – iSeeCars.com

“First of all, keep in mind that this is not ‘found money’,” wrote Philip Reed and Matt Jones at Edmunds.com. “It is actually your money being returned to you. But, since most people don’t include refunds in their budget, the temptation is to view it as a bonus and splurge.”

If you do plan to spend the money on a vehicle, Edmunds.com has a half-dozen suggestions on how to use the money wisely:

  • Use the money as 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 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 or new car, since it’s enough to cover about half of a 20 percent down payment on $25,000 to $30,000.

  • 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.”

More details are available from How to spend your tax refund on a car at Edmunds.com.

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

Until then, have a happy holiday season.

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