Every year about this time the Internet is flush with articles about how to best utilize your tax return.
In an effort to provide you with new and different material on this subject, I came to the conclusion that you can read every article from every “expert” you can find on the subject. Go ahead. Read until your heart’s content. In the end, only you know your situation and what works best for you.
But if you’re in the market to replace your current vehicle, you may consider using all (or part) of your tax return as a down payment. Here are a few reasons why:
- Cash down can lower your monthly payment – depending on your credit rating and financing terms, a (very) general rule of thumb when estimating monthly payments is, for every $1,000 down, your payment is reduced $20.
- Cash down can lower your interest rate. When the loan-to-value ratio of the vehicle poses less risk for a finance company, they may look more favorably on the transaction and offer a better rate.
- Cash down can save you money over the life of your loan. The less you finance, the less you will pay in interest, as long as you make your payments early or on time, per the contracted terms.
- Cash down can help close the equity gap. Keep in mind, when you finance a vehicle, taxes, fees and interest are all added onto the sale price of the vehicle. While regular, on-time payments will close the gap between how much you owe and how much the vehicle is worth, cash down up front can help close that gap faster.
In addition to the benefits of putting cash down, there is also the consideration that a down payment may be required. Depending on your credit history, trade value (if you have a trade), financing terms, etc., a lender may ask you to make a commitment (in the form of cash down) prior to extending an approval.
Buying a vehicle is exciting. So is getting money back from Uncle Sam. If you’re plan is to put two and two together to come up with four new wheels parked in your driveway, set up a test drive with your local FCA dealer.