It’s practically a national holiday at this point: Tax refund season. We’ve all filed our returns and are eagerly awaiting the government to return a check to us. And we might be considering a new car or suddenly find ourselves needing one. And then, inevitably, comes the pitch: the tax refund auto loan. But what are these… and why might they be a bad deal?
The Two Parts Of The Tax Refund Car Loan
One thing that’s not discussed is that the “tax refund car loan” is actually a two-part financial instrument. The first is essentially a payday loan based around your estimated tax refund. This is becoming increasingly common in the tax preparation industry; you might remember ads offering a “rapid refund.” That’s actually a loan.
However, it’s a loan that’s not subject to the same rules as a car loan; the interest rates can be higher, sometimes in the triple digits. Furthermore, that loan is based on you getting your return. If the government sees a delay in sending you a check, or the check that arrives in the mail isn’t as much as you thought, you’re still on the hook for the loan and the interest it’s racking up.
Similarly, the car loan can have its own problems. How far do you trust a dealership that wants to make money off you coming and going? They might be hiking your interest rates or giving you a lesser deal and you’d never know it.
Why A Down Payment Is Better
It may make the budget a little tighter, but if you need a car, and have a tax return coming, a down payment is a better option. For one thing, you’re starting your loan off in a way that’s more secure; you’re counting on cash in hand, not cash you haven’t seen yet.
Similarly, it reduces the overall principal of the loan, meaning you pay less. But what about the rest of the money? Few of us can just buy a car in cash off the lot.
Better Alternatives In Financing
That’s where finding your own financing comes in. If you track down and have your financing in hand for your car before you walk onto the lot, it changes the dynamic of the conversation. Now, you’re not somebody who may or may not be able to afford their car: You’re somebody with the money in hand, ready to go. It starts the conversation off differently and ensures that you get a fair deal, not least because the dealership has to impress you, not the other way around.
For many of us, a tax return is a needed infusion of capital at just the right moment. All too often the car goes out right when we have the money to replace it. But don’t let your needs blind you to problems; keep your return in your account, and finance your next car instead.
Photo credits: suphakit73 of freedigitalphotos.net, Arvind Balaraman of freedigitalphotos.net