Low Book Sales Official Blog

It’s that time of year again. Uncle Sam is coming for your taxes, and you’d better be prepared to pay up.

But if you’re like most Americans, probably don’t have to worry too much about that–you’ve likely had your payroll taxes automatically deducted from your paychecks throughout the year. This means you can reasonably expect a fairly sizable tax return. In fact, almost 8 out of 10 Americans are expected to get a tax refund.

Of course, don’t forget that this is your money – it always was, it’s just getting refunded back to you. And you get to spend it however you want (whether it’s for a big screen TV, or to pay off debt, or anything else, really).

If you’re in the market for a used car, spending your tax return toward that purchase can be a pretty wise choice. But first, let’s look at what people actually spend their refunds on, what is considered a “wise” choice, and why.

What people really spend their tax return on every year

Fewer people splurge their tax refund on an impulse purchase than you might think. According to CNN Money, the majority of Americans use their tax return to pay off debt (41.9%) or toward savings (42.1%). After that, people use it for everyday purchases, major purchases, or taking a vacation.

Buying a used car would be considered a “major purchase,” but that doesn’t make it an unwise choice. So what do the “experts” have to say about tax refunds?

Top recommendations from financial experts

Dave Ramsey, host of the “Dave Ramsey Show” and popular financial columnist, recommends using your tax refund to pay down debt – such as student loans and credit card debt – before putting it toward savings or spending it on wants or needs. This is because the longer you take to pay off debt, especially credit card debt, the more you’ll pay in interest. If using your tax refund helps you pay off debt months or even years ahead of schedule, you can potentially save yourself hundreds or thousands of dollars over the life of the loan. You’ll also get the benefit of having the burden of debt lifted off you, which can set you up for better financial stability down the road.

Not everyone thinks that paying off debt should always be the number one priority. The top recommendation from financial advice blog Money Crashers is to put your tax refund toward an emergency fund or “rainy day fund.” This is because an emergency is your first line of defense against inevitable financial disasters, like those unexpected car repairs or losing a job.

According to an article on ABC News, other beneficial ways to spend those refund dollars include saving for retirement, saving for college, and refinancing a home mortgage. These fall into the category of “long-term financial goals” we all should have if we want financial security throughout life.

So where does an auto purchase fit into all this? Is it wise to use your tax refund to buy a used car, or is it foolish?

As it turns out, it can be incredibly beneficial, and can actually stretch your tax refund dollars even further. Why?

#1 reason to use your tax refund toward buying a used car

Two words: interest payments.

The biggest reason using your tax return to help pay for a car is that it can save you thousands of dollars in interest payments over the life of a car loan. And if your refund enables you to pay cash for a used car, then you’ve avoided paying any interest at all.

Your potential interest savings is not a small matter, either. According to this interest rate calculator from Bankrate, a $15,000 car loan at 4% interest will cost you an extra $937 in interest payments over the life of the loan (assuming you only make the minimum payments of $332 every month). 4% is actually a pretty desirable interest rate reserved for people with good credit – if you’re forced to take a higher interest rate then it will only take longer and cost you more to pay it off.

So how can you use your tax refund to lower the amount of interest you pay on a car loan? It’s simple – you put it toward a down payment, lowering the total auto loan amount. Let’s say your tax refund allows you to put $7,000 in cash toward that $15,000 car. You’ll still need a loan for the remaining $8,000, but based on the calculator used above you’ll be paying only $499 in total interest (saving you almost $500). Additionally, your monthly payments will only be $177 for a 48-month loan.

If your tax refund helps you contribute a larger down payment for a car, then you’ll be stretching those refund dollars even further, because of the interest savings.

5 tips to help you get the most of your tax return at the car dealership

In order to have a positive experience at the dealership, and to secure the best deal, follow these 5 tips when using your tax return toward the purchase of a car.

1. If possible, pay in full with cash
When you pay for a car with cash, you’re saving yourself years of monthly payments and hundreds of dollars (or more) in interest.

2. Get approved before going to the dealership
If your return won’t cover a used car by itself, then get financing information for the remainder you’re willing to spend before going to the car lot. This helps you avoid spending too much, and you’ll be more likely to secure a lower interest rate if the dealership isn’t able to get you a better rate. Low Book Sales has such good relationships with lenders that 9 times out of 10 we’ll get you the same or lower rates than your financial institution approved you for.

3. Don’t get more car than you can afford
Don’t be tempted to go all out just because you got a big tax refund. Do your research and find a car that fits your needs and that will (hopefully) serve you for many years to come.

4. Make as big a down payment as possible
To get the most bang for your buck, put your entire tax refund into the down payment. You’ll be thankful you did when your monthly payments are lower and the car is paid off sooner.

5. Combine your tax return with a trade-in vehicle
If your tax refund isn’t enough to buy a car outright, then you may be able to combine it with a trade-in vehicle to cover the rest of the cost. This way, you’re essentially “trading up” for a newer or better vehicle, and avoiding the hassle of selling your old car on your own.

Additional resources for buying a used vehicle

Buying a used vehicle doesn’t have to be a hassle: here are some more resources to help you on your car-buying journey:

• Used Car Buying Guide
• Test Drive Tips and Tricks

Tags: auto loans