Things to Know Before Using a Tax Refund to Buy a Car

Used cars

It’s that time of year many people look forward to: tax refund season. It’s also the time of year used-car dealers look forward to, because people use those refunds to buy new-to-them cars.

Now, you might see articles claiming that tax refund car purchases peak around April 15. That’s not true. The only people filing tax returns then are those who owe taxes – not those expecting refunds.

What’s the first thing you want to know about buying a used car with your tax refund? Now is the worst time to buy a used car with a tax refund. How come? It’s simple. Between now and the end of March, it is a seller’s market when it comes to used cars.

First Thing to Know
Smart sellers (i.e., used car dealers) know people have money burning a hole in their pockets. They’re eager to spend that money fast on something new and exciting. Odds are these consumers haven’t done the basic research before buying.

What’s the basic research you should do? It sounds simple, but you’re going to want to establish the basic value of the used car you want. It’s easy here at CarGurus thanks to our Car Values page. Tell us what kind of car you want and where you’re shopping, and we’ll tell you its Instant Market Value.

Then visit the CarGurus Used Cars page, tell us what kind of car you want and your Zip code, and you’ll see a wide selection of vehicles in your area. You’ll see whether each price is fair, a good deal, or a great deal, and you’ll also get warned if the price is too high. You’ll also get to see reviews of the dealership selling each car, so you can make an informed decision on whether you want to schedule a test drive.

The other important piece of information is how long the car has been advertised on the Internet. See a car you like? Well, if it has been advertised for 60 days or more, you’re probably going to find a seller willing to deal.

Second Thing to Know
With your tax refund you are going to want to know how much to spend. Again, it sounds simple, but just because you earned a $2,500 refund doesn’t mean you should put all that money into a new-to-you car.

You’re going to want to hold some of it back to pay for things like new registration costs. Or set it aside to pay higher insurance premiums. Don’t handle everything through the used car dealer, though, because it’s likely going to end up in your loan. You really don’t want to pay interest on a title transfer if you can avoid it.

Third Thing to Know
Don’t be afraid to treat yourself if you have the money. One of the nice things about tax refund time is you can invest extra money and get a nicer used car. It’s okay to splurge if your bank account can justify it.

However, don’t go into debt to finance the down payment on your next car. Tax preparation services offer refund anticipation loans. They come with high interest rates. Unless your car is broken down dead, resist the temptation. You will be glad you did.

-Keith Griffin

Find Certified Pre-Owned Cars and Used Cars in your area at CarGurus.

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