Tax season is nearly upon us once again, and if you've been waiting for that extra push to get you over your saving goal for a car loan this could be your year! Why not use your hard-earned tax refund to get yourself into an even better vehicle than you were expecting?
Tax Refunds as Down Payment
When you need to finance a car, the loan amount you're eligible for depends on a few factors which include your credit score, your financial stability, and the available funds you can put towards a monthly payment. No matter your credit score, there's a surefire way to get into a more expensive vehicle: using a down payment.
A down payment is the money due at the time you sign your auto loan contract. The amount you use is subtracted from the pre-sale sticker price of the car, lowering the amount you have to borrow. The less you borrow, the less you have to pay back. You can think of a down payment as a good faith payment – something you're giving the lender in order for the opportunity to drive a vehicle off the lot.
With decent credit – typically a score of 660 or above – you may not need to present as large a down payment as someone who's struggling with a lower score. However, if you do have what's considered bad credit, you're generally required to make a down payment of at least $1,000 or 10% of the vehicle's selling price, sometimes whichever is less.
If you're already saving for a car loan, this is where your tax refund could be a game-changer for you, depending on your situation. You can use your refund to either meet the lender's minimum requirement or add it to your savings to bring an even larger down payment to the table. This can help save you money in the long run, or help you qualify for a better vehicle.
Financing Options for Bad Credit Borrowers
Down payments are typically a requirement for many borrowers, but it can be difficult to save a large amount for many people. With a good-sized tax refund, you can meet and/or exceed a payment requirement and widen your vehicle choices as a bad credit borrower.
Even with a down payment in hand, you still need the right lender for your credit situation.
Traditional or Direct Lenders:
These lenders tend to work with borrowers that have the highest credit scores. This is often what consumers think of when they think of an auto loan, or a pre-approval. Getting a loan from a direct lender such as a bank or a credit union can be hard with a lower credit score, but it's not impossible.
If you haven't been able to qualify for a loan with a direct lender due to credit, a larger down payment using your tax refund may help you borrow less. Bringing down your initial loan amount could help you qualify for a traditional car loan.
There is a group of lenders known as subprime lenders, that work specifically with bad credit borrowers. These lenders are typically third-party lenders that are signed up with the special finance departments of select dealerships.
They’re indirect lenders and you never actually meet with them. Instead, the finance manager at a dealership acts as your go-between. The good thing about subprime lenders is that they know there’s more to a borrower than a credit score. They take a deeper dive and look to make sure that you have the ability, stability, and willingness to take on an auto loan.
In doing so, they factor in the amount of your down payment. Once you meet the lender's minimum requirement, any additional money you bring to the deal only enhances your negotiation power and widens your vehicle choices.
If you have a trade-in as well as extra money from your tax return, combining them can make a large impact on the auto loan deal you qualify for. A larger down payment often enables you to qualify for a lower interest rate, a shorter loan term, or a better equipped, newer vehicle such as a certified pre-owned (CPO) car.
When you're unable to qualify for a subprime auto loan, you're not out of the running for vehicle financing especially if you can bring in a substantial down payment. When you've been denied a car loan due to low credit, you may still qualify through a buy here pay here (BHPH) dealer.
BHPH car lots are known as in-house financing or tote-the-note dealerships, and the dealer is the lender. These dealerships seldom check your credit score, so it can be easier to get into a loan with bad credit. In order to make up for the lack of a credit check, in-house financers typically require you to prove you make enough to pay for the loan with check stubs and proof of employment, and to bring in a substantial down payment.
The amount you have to put down typically varies by the cost of the car you're considering with a BHPH dealer. A good rule of thumb is to try and put down as much as possible. It's common for in-house financing to require around 20% of a vehicle's selling price as a down payment. If you weren't able to meet this requirement before, and BHPH is your second chance at an auto loan, your tax refund could give you the added funds you need.
Finding the Right Dealership
With tax season coming up, planning what to do with your anticipated tax refund can be fun, but don't forget that tax season comes but once a year. This year, the Internal Revenue Service (IRS) is planning a return to the standard tax-filing deadline of April 15. The sooner you file your taxes, the sooner you often get a refund if you're owed one. Getting on this as soon as possible could also allow you to take advantage of tax-season sales at some dealerships.
If you need another vehicle and are planning to use your tax refund to help with a down payment, make sure that you're visiting the right dealership for your situation. If you're not sure where to start, or you're afraid of bad credit standing in your way, you've come to the right place.
Here at The Car Connection, we specialize in connecting borrowers to special finance dealerships that have the lending resources available to get you into the car you need. Let us take the stress of finding a dealer off your shoulders by matching you to a local dealership with subprime lender opportunities. Get started right now by filling out our no-obligation, free auto loan request form.