Okay, you’ve weighed all the advice and options, and decided buying a car is how you will spend your tax refund. Your mind is made up. Now what? If you type "car" and "tax refund" into your browser, out will squirt countless stories, blogs and gems of advice on using your tax refund to buy a car. Thinking of that mountain of cash and picturing yourself behind the wheel of that shiny new ride can be exciting, fun and, well, a little foolish. It’s a tidy sum of money, but it’s not lottery winnings. This is extra money your employer took from you, loaned to the government and, after you filled out a lot of paperwork, the government is returning it to you without interest. It was always your money.
If you are determined to put that hard-earned money toward your transportation, we’ve put together a short list of mistakes we hope you avoid.
Acting Like a $10 Millionaire
Granted, none of us think of ourselves as average, but the ugly truth is, according to the IRS, the average refund check is about $3,000 (recent tax changes may mean even less). Although it may sound like a lot, Kelly Blue Book pegs the average transaction price of a new car at around $35,000. See the problem? Using the average example, the refund check is equal to less than 10 percent of the cost of the average car. In other words, don’t bite off more than you can chew. In our "average" example, you would be left with a $32,000 tab to finance and that’s before interest. To make the most of your refund, here are some cars for sale under $15,000 to consider.
Rushing to Judgment
It’s only human nature that once we’ve made up our minds to buy something and a fat check appears in our hands, we react like Sea Biscuit when the starting bell rings at Churchill Downs. Chill. You need to do all of the things Autotrader advises you to do when buying a car. Get online and do the research. Go to your bank or credit union and get prequalified for a loan. Check with your insurance agent to find out any extra insurance premiums your pick might entail. Simply stated: Do the work.
Suffering From Tunnel Vision
When it comes to putting your tax refund toward your ride, there is more than one way to do it. Maybe one way is better for you or maybe it doesn’t matter. But, don’t get locked into one idea from the start. Be creative. The obvious path is to use that refund as a down payment. But there are other avenues. How about going with a zero-down loan underwritten by a carmaker’s finance arm like Ford Motor Credit? Then you use that refund to pay the monthly payments until the refund runs out. Or, you use it to pay down the principle on your current car loan through refinancing. You have options.
From mid February through the end of April, we are bombarded by ads promising to match our refund check toward the down payment on a new car. Yep, they will essentially double your down payment. Don’t get hoodwinked. Read the mouse print. More than likely there are limits as to the amount the dealer will match. Or, if you read closely, the offer is restricted to specific models or even worse, to only a few specific cars on the lot. Also, many of the great deals you see advertised on TV are for those with the absolute best credit. If you walked in to a dealership with a $10,000 refund check, do you think they’d match it on that $15,000 car you’re buying? Not likely.
Overlooking Certified Pre-Owned
Almost every carmaker has a certified preowned (CPO) program. These are late-model cars, many of them off-lease, that the dealer inspects (based on manufacturer criteria), refurbishes and sells according to that brand’s requirements. Many automakers offer financing deals on CPO vehicles, as well as other perks, like free satellite-radio subscriptions and roadside assistance. That refund check will go a lot further buying used or CPO, and you won’t be left with as big a loan to deal with month after month. To make your refund go farther, here are some affordable certified pre-owned cars for sale that you might want to consider.