How to use your tax refund for a car purchase

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.*

One of the main reasons is the chance for qualified buyers to use their tax refund for a down payment on a car. The average income tax refund in recent years has been around $3,000, and buyers may decide to use all or part of that check as money down.

A down payment may help when purchasing a vehicle because lowering the amount of money that needs to be borrowed may also lower the monthly payment and the total cost of financing, advises the Consumer Financial Protection Bureau.

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 to use your tax return for a car purchase [Infographic]


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, is almost enough to cover the typical 10 percent down payment on a new car (the average new-car price was $33,666 in March 2016, according to Kelley Blue Book). And it would more than cover 10 percent down on a used vehicle (the average used-car price was $19,232 in the third quarter of 2016, according to Edmunds).

Here’s how that 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. Using RoadLoans’ auto loan calculator 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. Of course, a larger tax refund would enable the purchase of a more expensive car for the same payment.

Here’s 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 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 are guaranteed, but at least they give shoppers a sense of how to apply their tax refunds to monthly payments, or the number of months of payments.

Research both cars and auto lenders

With an idea of what you can afford and how using a tax refund for a down payment might lower your costs, you’ll be in a good position to research affordable vehicles. Consider reading expert and consumer reviews online at websites like Kelley Blue Book, Edmunds, Autotrader and

Turning your thoughts to auto lenders, you might want to try and get preapproved before visiting a dealership. Preapproval gives you the power of knowing the terms of your auto loan, including the total loan amount, loan term and APR, so you can shop with the confidence of a cash buyer in the dealer showroom.

Direct-to-consumer lenders like RoadLoans enable consumers to apply for a loan online in minutes and get an immediate decision. Once approved, review the terms of your approval, download and print your loan documents and take them with you to a recommended dealer within RoadLoans’ nationwide network. Our 14,000 dealerships offer a huge inventory of quality new and used vehicles.

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 return might work with auto financing to your advantage. Here are a couple more situations:

  1. Pay down principal

If you have an existing car loan, using your tax return 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.

  1. Refinance your current auto loan

If it turns out that you owe funds to the U.S. Treasury rather than are owed 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.

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.

RoadLoans accepts applications for both cash-back and traditional refinancing. We don’t however, accept applications to refinance a loan from existing Santander Auto Finance and Chrysler Capital customers.

More about auto financing

For more information about buying a car or refinancing your existing note, visit RoadLoans’ car loans and auto refinancing pages, and use our auto finance calculators to see how the numbers look.

Apply for auto financing and get an instant decision.


* These statements are informational suggestions only and should not be construed as legal, accounting, or professional advice, nor are they intended as a substitute for legal or professional guidance. Please consult a tax professional.

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