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Use Your Tax Refund To Buy a Used Car

Sounds Like a Good Idea But It May Not Be


Use Your Tax Refund To Buy a Used Car

It may be tempting but resist using your tax refund to purchase a 2008 Corvette 427 Special Edition Z06.

Photo by Alan Poizner for General Motors

Tax season is upon us and so are tax refunds for those who don't plan well and have too much withheld by the government annually. A survey shows a lot of folks may use their tax refund to buy a new or used car.

Sounds like a good idea but it may not be for a variety of reasons (and it might be for others). A new survey commissioned by eBay Motors found that more than one-third of vehicle owners anticipating tax refunds will spend a portion of their newly found cash on something related to a car, truck, or motorcycle, and the parts to repair and maintain them. The data is based on a survey conducted for eBay Motors by Harris Interactive, which polled more than 2,200 adults across the United States.

According to the survey, 34 percent of current vehicle owners expecting tax refunds said they will spend part of their refund money to buy new or used cars or trucks, or spruce up their current vehicles. The categories in which the most people intend to put their tax refund dollars toward are:

  • Maintenance (49%)
  • Repairs (32%)
  • Buying a new or used vehicle (21%)
  • Tires (19%)
  • Cleaning or detailing (14%)

Editor's note: Survey respondents were able to select multiple options.

Based on the info in the eBay Motors survey, Americans appear to view tax refunds as opportunities to make purchases of vehicles associated with the joys of driving. The search terms on eBay Motors that have shown the greatest increase in frequency during the past two tax seasons are motorcycle, sports car and exotic-related vehicles, such as: Harley-Davidson, Corvette and Mustang. (Editor's note: read my advice on how to buy a used Corvette.)

Here are some pros and cons about using your tax refund to buy a used car.

  1. PRO: You don't have to save for a down payment. Most Americans are going to use their refunds for down payments. According to the IRS, the average federal tax refund is $3000 (in spite of what you see in those H&R Block commercials).
  2. CON: You're not going to get a good used car for $3000. (Honestly, the best used cars outside of certified pre-owned are usually in the $8000 to $10,000 range for most of us.) Instead, you're going to experience momentary financial exhilaration followed by the realization that you're further in debt.
  3. CON: You'll end up paying too much. One of the problems with exuberance is impatience. Your money will be burning a hole in your pocket. You will be itching to spend it, which means you may not do your homework. You may not pay the right value for the used car. Learn how to value a used car.
  4. CON: There's going to be a lot of people out there just like you. People who are flush with cash. People like this don't buy 2005 Chevy Malibus. They want those Mustangs and Corvettes that people are searching for on eBay Motors. That means it's a seller's market this time of year.
  5. CON: Dealers know you're flush with cash, especially because you're not going to be able to resist saying, "I'm using my tax refund as my down payment." To you it sounds cool. To savvy dealers, it signifies "a fool and his money are soon parted," to quote a long-dead British farmer and poet named Thomas Tusser. (Like most, I would have attributed that to Mark Twain actually.)
  6. PRO: You'll save money by buying now. Used cars keep going up in price. By buying now, odds are good you'll be paying less for your used car than if you had waited.

One of my boring mantras has always been it's cheaper to fix a used car than it is to buy a new one. Want to just feel better about your current set of wheels? You may be able to pick up some deals over at eBay Motors' Uncle Sam's Garage. "People who plan to spend part of their refund on their vehicle this tax season can get even more for their tax refund dollars by visiting eBay's Uncle Sam's Garage, a site offering rebates and sales on wheels, rims, tires, turbo kits and more throughout the tax season," officials said about the program that runs through April 17.

Hold off, if you can, on purchasing a used car with your income tax refund. It's not easy to exercise financial discipline (I'm horrible at it but fortunately my wife isn't.) Maybe consider adjusting your withholding so you don't need a big income tax refund. Might be nice to have that extra $50-$60 a week in your pocket to spend on things like, I don't know, gas?

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