Edmunds: 5 smart ways to use your tax return on a car

Tax season will be coming to a close later than usual this year, due to the May 17 extended deadline. Until that time, you might hear advertisements from car dealerships urging you to bring in your refund or pandemic stimulus check to buy a new car. Given that the average tax refund issued in 2020 was $2,741, according to the IRS, it is a solid amount that people often use to make major purchases.

What’s the best way to spend extra cash from your stimulus money or tax refund if you do decide to apply it to your next or current vehicle? Edmunds’ experts have five suggestions.

USE IT AS A DOWN PAYMENT

The ideal down payment is one that’s large enough to give you a comfortable monthly payment yet still allows you to keep some money in your emergency savings account. But this has been harder for many shoppers to do as vehicle prices have risen over the years. The extra cash from the tax refund or stimulus check can make for or bolster a good down payment.

A larger down payment does a number of things to help people in securing a car loan. First, it shows the lender how serious the buyer is about taking on a loan. It also reduces the likelihood of the buyer owing more on the loan than the car is worth. Most importantly, the reduction of the loan amount means a smaller payment to fit better into a buyer’s budget. That, in turn, makes it easier to get approved.

MAKE A LARGE DRIVE-OFF PAYMENT ON A LEASE

Normally, Edmunds recommends that you spend only the drive-off fees, usually the first month’s payment, registration and the startup fees, to begin a new lease. However, if you start your lease with a larger down payment, the monthly lease payments will be a lot lower. Not only are lower payments easier to manage, but if you want to extend the lease, you may be allowed to continue to pay this lower amount on a...