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7 Things to Watch For When Buying a Car with Your Tax Refund

Each year, thousands of workers around the nation intend to use their tax refunds to purchase new vehicles, according to a survey by eBay.

Determining how much of the refund to appropriate towards purchasing a car is a major decision that depends on your budget, lifestyle, and financing options. There are seven considerations to keep in mind to successfully use a tax refund for the purchase of an automobile.

  • Monthly budget. Many prospective car buyers get so carried away with the notion of a tax refund that they forget about being realistic with their ongoing budget for monthly payments. In other words, while it’s financially savvy to use a portion of a tax refund to make a down payment, it’s wise to look at cars you could otherwise afford without a tax refund. Thinking of a tax refund as a bonus increases the likelihood that you can keep up with monthly loan payments, thereby improving your credit.
  • The percentage you’re willing to spend. Most taxpayers receiving a refund use 25 to 35 percent of the refund on the purchase of a car. Whether you decide to use a fraction of the refund on an automobile or the entire amount, it’s critical to carefully deliberate the decision. As exciting as a new car is, it’s important to remember that there are other places the refund can go, such as savings or paying outstanding bills.
  • Down payment vs. monthly payments. When you use a tax refund to purchase an automobile, you can apply the money towards the down payment or stretch it out to cover monthly payments. If you receive the average $2,650 tax refund that most Americans do, for instance, you could use the money to make monthly payments of $265 for 10 months instead of appropriating it up front.
  • The car you want. Determining the car you need before receiving the tax refund is likely to save money in the long run. Many taxpayers wait until receiving their refund to determine what they can and can’t afford. Instead, it’s better to select a car beforehand and then figure out how the refund can help make the payments affordable.
  • The amount of your down payment. While it’s possible to finance a loan with no money down, the recommended down payment for a car is 20 percent of the principal purchase price. Though this varies based on individual situations, it’s a good guideline to help determine how to use your tax refund.
  • Be patient. It’s probably not a good idea to purchase a car the moment you receive your refund. Instead, be patient and take some time when making any significant purchase. If you truly consider your needs, you’re more likely to find the best deal before signing anything.
  • Preparing for financing. Regardless of how you use the refund during the purchase, it’s important to prepare yourself for financing. This ensures that you can take advantage of good credit-building debt to rebuild your financial reputation and identity.

Have you thought through all your tax considerations when it comes to purchasing a car? Stay tuned for Part 2 of the TaxTime series!