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    Why You Should Use Your Tax Refund For Your Next Auto Loan

    The IRS and Treasury Department have officially extended the tax filing date for fiscal year 2019 to July 15th, 2020. As of now, refunds are still being processed by the department.

    If you’re planning to buy a new car, this is the right time to use tax refunds to finance a portion of a car, cover the expenses of an auto loan, and maybe even handle the entire down payment. Ultimately, the best strategy depends on how much you receive after filing the returns.

    How A Tax Refund Can Help

    Using the tax refund to fund the loan can help you save a lot of money that you would have otherwise paid as interest over the term of a loan. For borrowers with comparatively lower credit scores, this extra sum of money can go a long way towards securing favorable rates and flexible terms. It is also easier to get pre-approved when you have additional funds in your savings account, which can help you negotiate even better rates.

    Besides these benefits, when you have a few thousand dollars in savings, you can rest comfortably realizing that you have at least a few months of payments covered. A $3,000 tax refund, for example, may be used to make car payments lasting between six months and a year. Moreover, you’ll have enough money in the bank to avoid any near-term financial turmoil.

    There are multiple strategies for distributing these excess funds depending on your financial goals and tax return amount.

    Making A Down Payment

    You can use the refund for a down payment. This will help you access better rates and save money over the loan term. There is no fixed limit to this, but most lenders ask anything between 10% to 20% of the car’s cost. Eventually, the bigger the down payment, the better the rates you can access.

    For instance, the down payment on a $20,000 vehicle might be approximately $5,000. If you can add your tax refund to this amount, you’ll save a lot in terms of interest over the loan term. 

    Making Several Payments In One

    Another way of using the refund is to allocate it to your upcoming loan payments. This leaves you with enough legroom to utilize your income for other more pressing needs.

    Let’s say, you have a $20,000 loan outstanding for 48 months at 3.75% APR. Your monthly amount due is $449. If you receive a $5,000 tax refund, you can cover almost 10 months of payments comfortably.

    New Vs Existing Car

    Tax refunds can be used in different ways, both for new and existing cars. While new buyers can use it for down payment, monthly payments, buying insurance, and more, it can also come in handy for people who already have a car.

    For instance, you can use these excess funds to service your vehicle. If your vehicle’s warranty coverage has expired, you can use this sum to renew it. Alternatively, you can use it to fund sudden repairs or ongoing maintenance costs, gas bills, or buy gap insurance if the existing term permits.

    In addition to the above, tax refunds can also be used for the following purposes.

    Pay Down Principal

    You will save money on interest over the remaining duration of the auto loan by using the tax refund to pay off the outstanding principal. Use an amortization calculator to see if your loan and cumulative payments will be impacted by the addition or subtraction of your principal and interests. Also be on the lookout for any prepayment penalties which may negate any benefit from repaying early.

    Refinance Current Loan 

    If you’re stuck with an ongoing auto loan at a high rate and want to refinance, a tax refund can help you get better rates as you can use it as security. However, note that refinancing isn’t always beneficial, especially if you’re at the end of term or the current loan is upside down. 


    Millions of Americans receive tax refunds every year from the US Treasury. If you have received your refund or are expecting it soon, using excess funds for a new car is a smart plan. Excess funds in your savings account indicates a healthy income to expense ratio, which improves your chances of receiving quick approvals, competitive rates, and flexible terms.

    Even if you aren’t buying a new car, you can still use these funds to clear ongoing loans partially or in full. You can also use it to fund other expenses related to your existing vehicle.

    Make the most of your tax refund by understanding where you can uncover exceptional savings.