Is it a good idea to use your tax refund as a down payment on a car?

Tax season is upon us again and if you’ve filed your taxes and have a nice refund coming up, then there’s a myriad of things you can do with it. You can save it, invest it, or if you’re looking for a car, you can use it as a down payment. But is it really a good idea?

Pay a deposit with your tax refund

Potential car buyer | Getty Images

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Considering you can do anything with that nice amount of money you get from Uncle Sam, it’s a good idea to use it for a down payment on a car. After all, it’s money that technically doesn’t come out of your personal stash in your savings, so why not throw it at the price of a car you want? If you need more reassurance, you can consider it a “worthy investment for your personal transportation needs”, or any other mindset that helps justify your cause.

On a more serious note, using your tax refund for a down payment can actually help you pay off the car sooner and avoid more interest charges. You can either use the refund as your total deposit, or simply add it to a deposit you’ve already saved up for. You can also use it as an allowance to cover some of the monthly car payments. Whichever way you choose to use the rebate on a car purchase, it will be beneficial.

Using your tax refund on an existing car loan is also advantageous

A couple checks a car at a dealership

A couple checks out a car at a dealership. | MYCHELE DANIAU/AFP via Getty Images

While using your tax refund to buy a car is a good idea, you can also use it against an existing car loan. If you’re currently paying for your car, here are some ideas on how to spend your refund, depending on Car connection:

  • Pay off or repay existing loan
  • Invest in the maintenance or repairs your current car needs (tires, brakes, etc.)
  • Use the refund for car upgrades or modifications
  • Use the refund to purchase an extended warranty for your car
  • Use the reimbursement to buy GAP insurance

Using Your Tax Refund Can Help If You Have Bad Credit

A Ford dealership.

A Ford dealership. | Francis Dean/Deanpictures

If you’re looking to buy a new or used car but have low credit, using your tax refund can give your situation a big boost. Lenders require buyers with poor credit to put down a down payment when buying a car to reduce liability over the life of the loan. Most of the time, a down payment of at least $1,000 or 10% of the price of the car is required and a tax refund can help you reach this amount.

No matter how you plan to use your tax refund—whether you want to save it or spend it—it’s not a bad idea for the cost of a car. After all, cars cost a good amount of money, so why not spend a little more change on it? You might be glad you did later.

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About Matthew R. Dailey

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