Don’t Spend Your Tax Return on a Used Car Just Yet

For a little bit of service legwork, dealerships can command better prices for used cars [through CPO programs].

If you haven’t noticed, America’s been on the up-and-up lately. Our Gross Domestic Product (GDP) continues to rise, more Americans are heading to work, and we’re slowly reinvigorating domestic manufacturing. And rises in productivity and employment beget more money for the average car buyer, money that dealerships are eager to scoop up.

According to consulting firm Manheim and its Used Vehicle Value Index, used-car prices are on the rise. Manheim states that its index is up 1.1 percent from a year ago and up 0.8 percent over last month. This, despite the fact that absolute used-car sales were down 1.3 percent in February. Wait a second – fewer cars being sold, yet prices are on the rise? How does that work out?

If you wait a little while and drop your return into an interest-bearing account, you’ll have even more money to spend.

It works because buyers have more money to spend on each vehicle. This is right about the time where tax returns start arriving in the mail (or into a direct-deposit account, if you live in the 21st century), and people are always eager to burn some cash they didn’t necessarily intend on having otherwise. According to Manheim, the IRS has already processed nearly 40 million tax returns, three-fourths of which required refund disbursements. That’s well over $100 billion being placed directly into the hands of consumers.

There are other factors, as well. As America recovers from the last decade’s recession, lines of credit and enticing interest rates are becoming more widely available once again. That means it’s easier to get the car you want (or need) at a price that won’t force you to also live out of that car. Furthermore, many tax returns were delayed last year, stifling the flow of cash to consumers. When credit is more readily available and people have money to burn, it’s time to buy some cars.

Of course, dealerships are businesses first and foremost, with the Prime Directive being profit. Seeing more money heading towards their doors, it’s a natural reaction to bump prices up in order to maximize profits. Part of that can also be pinned to the expansion of certified pre-owned vehicles, which saw a 12.3 percent increase in sales over the first two months of last year. For a little bit of service legwork, dealerships can command better prices for used cars, keeping profits high without needing to sell every car on the lot.

It’s hard to keep a wad of cash (averaging about $3,000 per tax return) from burning holes in the pockets of spend-happy Americans. And now is certainly a good time to buy a car, as the weather is finally improving (your author is knocking on his desk as he writes this). However, if you’re relying more on cash and liquid assets than financing, we might suggest holding off a little while so that the used-car market can normalize its pricing. Unless you want a compact – currently, compact car pricing is on the decline due to high supply.