(RoadLoans)- If you’re in the market for a new vehicle then you should know something about tax season: tax refunds and car loans are a good match.*
That’s because refunds, which have averaged around $3,000 in recent years, can provide many approved buyers with a ready-made down payment on a car, or at least a useful chunk of it. And that money down may in turn lower their monthly payment and total financing costs.
The following infographic has been put together for car shoppers expecting a tax refund, and outlines how it may be used to get a new or used vehicle in six simple steps.
How using a tax refund for a down payment could affect financing
Let’s see what kind of difference a tax refund might make to financing a car. A refund of $3,000, for example, goes a long way toward covering the typical 12 percent down payment on a new car (the average new-car price was $34,870 in November 2017, according to Kelley Blue Book). It would also more than cover 12 percent down on a used vehicle (the average used-car price was $19,402 in the third quarter of 2017, according to Edmunds).
Lower monthly auto payment
Here’s how such a down payment might lower your financing costs. Let’s say you’re looking at buying a car for $20,000 and you have a trade-in worth $5,000. We can see that entering a loan amount of $20,000 (effectively $15,000 after the trade-in value), with a 60-month loan term, 2.9 percent APR, and $5,000 in the down payment field, results in an estimated monthly payment of $268.86.
Adding $3,000 from a tax refund to the $5,000 already in the down payment field, to make $8,000 in total, drops the monthly payment to $215.09 – a potential saving of $53.77 per month – and may also save you money on interest charges. Of course, a larger tax refund would enable the purchase of a more expensive car for the same payment.
A head start on your payments
This is another option for using a tax refund for a car purchase. Instead of using the money as a down payment it could be used for making a number of monthly payments on the new auto loan. A refund of $3,000 could be used to make 11 payments of $268.86; almost a year’s worth on a five-year loan term. Not a bad start.
None of these calculations is guaranteed, but they give shoppers a sense of how to apply their tax refunds to monthly payments, or the number of monthly payments in the loan term.
Research both cars and auto lenders to better your position
With an idea of what you can afford and how using a tax refund for a down payment may lower your costs, you’ll be in good shape to research affordable vehicles. Consider reading expert and consumer reviews at websites like Kelley Blue Book, Edmunds and Cars.com.
Turning your thoughts to auto lenders, you might want to try and get preapproved before visiting a dealership. Preapproval gives you the advantage of knowing the terms of your auto loan, including the total loan amount, loan term and APR, up front so you can shop with the confidence of a cash buyer at the showroom.
Two more ways tax returns and car loans may work together
A down payment on a vehicle, or ready cash for a stretch of car payments, are not the only ways a tax refund might work with auto financing to your benefit. Here are a couple more situations:
- Pay down principal
If you have an existing car loan, using your tax refund to pay down the principal may save you money on interest over the life of the loan.
Use an amortization calculator to see how adding to or subtracting from your principal and interest affects the loan and total payments.
- Refinance your current auto loan
If it turns out that you owe funds to the U.S. Treasury rather than are due a refund, refinancing your existing vehicle loan may be a means to get money for your taxes and possibly improve upon areas of your existing loan.
A cash-back refinance of your existing auto loan, in simple terms, is a way to get a new loan and at the same time get some cash. The cash in hand adds to the loan’s principal, which does make the loan “larger.” But if your credit has improved over the course of the loan, or if interest rates have fallen, then you may be able to get better terms on the refinanced loan, like a lower APR.