Using Your Tax Refund as a Down Payment on a Car

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


, - March 18, 2019

If you’re expecting a tax refund this year and are looking to buy a new or used car, you may want to consider using that refund toward a down payment. Whether or not you're required to put money down, a down payment can help lower the overall cost of your loan.

Using Your Tax Refund on a New Vehicle

If you have good credit, you may not need a down payment when you finance a car. If you have bad credit, however, subprime lenders are going to require you to put money down in order to qualify.

You don’t have to put a lot down – usually a minimum of $1,000 or 10 percent of the vehicle’s selling price, whichever is less, is all that’s required. But if you get a large tax refund and can afford it, it may be in your best interest to put more down.

If you can, a down payment that’s close to 20 percent is a great way to save even more money on your car loan. Not only does a larger down payment improve your approval chances, it also helps lower the monthly payment and overall interest charges, as well as reduce, or eliminate, the time you’re upside down (owing more on the loan than your vehicle is worth).

Using Your Tax Refund on Your Current Car

If you’re not sure about buying a new car just yet, you could use your tax refund on your current vehicle, too. There are two options for you to consider:

  1. Pay down the loan – If you’re currently upside down on your car loan, you could use your tax refund to pay down the loan balance in order to get rid of, or reduce, the negative equity. Even if you're not upside down, making a large payment ahead of schedule helps you pay off your loan sooner, which saves you money in interest charges in the long run.
  2. Refinance – If you took out a bad credit auto loan, your interest rate is probably higher than average. If your credit has improved and your tax refund is enough to eliminate any negative equity, you may also be able refinance for a better interest rate and a lower monthly payment. Make sure your credit score has improved enough and at least two years have passed, because not everyone can qualify to refinance.

Ready to Use Your Tax Refund?

It’s important to consider all of your car buying options before you head to a dealership. You may want to use your tax refund elsewhere, or even on your current vehicle. Once you feel confident that buying a new or used car with your tax refund is right for you, we can help you find a dealer to get the process started.

CarsDirect works with a nationwide network of dealerships that specialize in helping buyers in difficult credit situations get financed. Instead of wasting time and energy trying to find a dealer that can help you on your own, let us do the searching for you.

Submit our free and secure auto loan request form today, and we'll get to work finding a dealership near you that stands to help you out.

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


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