Tax season only rolls around once a year, and the refund that it brings can be a great way to start an auto loan. If you have a general idea of the size of your tax refund, but your credit score is less than ideal, we have some tips on spending that cash to your advantage.
Tax Refund as Down Payment
Your tax refund may really help with starting a car loan off on the right foot – if you use all of it, or part of it, as a down payment on a new auto loan.
When you have bad credit and you’re looking into buying a car with a subprime auto loan, one of the qualifications you have to meet is a down payment requirement. Subprime lenders typically require at least $1,000 or 10% of the vehicle’s selling price. If you’re able to make this down payment with your tax refund, it could really lift a weight off your shoulders.
A large down payment also means a lower overall cost because you pay less in interest, which is the cost of borrowing money. Car loans are usually simple interest loans, meaning the interest you’re charged is on the amount you owe. The less you owe, the less you pay in interest; the bigger your down payment, the less you owe.
Say you’re buying a vehicle for $10,000 with a 10% interest rate with no down payment, and a 60-month loan term. Your monthly payment will be around $212, and you’ll pay a total of $2,748 in interest charges.
Now, imagine financing the same car for $10,000 with a 10% interest rate, and a 60-month loan term. But, you add a down payment of $3,000. Your monthly payment is now around $149 a month, with only $1,924 in total interest charges. That’s saving you $64 a month in disposable income, and $824 in interest charges – a little easier on the wallet.
Using your tax refund as a down payment isn’t the only way to make that money work for you. It can also help you avoid other issues with your auto loan.
Use Your Refund to Avoid Negative Equity
Your tax refund can also be used to help you avoid negative equity. Having negative equity isn’t fun, but the larger the down payment you put on an auto loan, the better chance you have at either reducing or eliminating the time you spend being upside down.
Whenever you’re buying a car, there’s a risk of negative equity, also called being upside down or underwater on your auto loan. Negative equity happens when you owe more on the vehicle than it's actually worth. A down payment can help cover that gap while helping you reduce the amount you pay interest charges.
If you find yourself with negative equity on a car, you may not be able to refinance for a better interest rate or longer loan term. Additionally, if you want to trade the vehicle in, you’ll have to pay the difference between the actual cash value (ACV) and your loan balance.
Also, your auto insurance only covers the ACV of your car in the event of accident or theft, not what you owe on the loan (unless you have GAP insurance).
Preparing for a Bad Credit Car Loan
Once you receive your tax refund, you can start budgeting for your next car loan. If you’ve got bad credit and you want to know what to expect, you can do some research at home. To help calculate some estimates of your monthly payment, you can use online auto loan calculators. To use one, you simply enter:
- The price of the vehicle.
- An estimated interest rate you may qualify for based on your credit score.
- How much you plan to use for a down payment.
- The loan term, in months.
This can help you get a feel for how much you’ll be paying in interest, the size down payment you may need to get to your desired monthly payment, and the loan term that works within your budget. Overall, this can help give you a basic idea of how much car you can realistically afford.
Coming up with a large down payment can be one of the hardest requirements for bad credit borrowers to meet, but it really is in your best interest to put down as much as you can afford – and using your tax refund can help with the burden.
Additionally, if you keep up on your payments throughout the loan term, your credit score will likely improve, and you may qualify for a better auto loan interest rate in the future!
Ready to Get Started?
Car shopping can be stressful – especially when you have less than perfect credit. At Auto Credit Express, we want to help make the car buying process a little easier.
We've teamed up with dealerships across that country that have special finance departments. These departments work with bad credit lenders who know you’re more than a credit score. We want to help connect you to a dealer in your area. To get started, simply fill out our simple, secure, and free auto loan request form.