Tax refund as down payment? Why not?

Jim Henry is a special correspondent for Automotive News.

The first quarter is typically the strongest quarter of the year for subprime financing and used-car auto loans due to the timing of tax refunds, say industry experts such as Asbury Automotive COO Michael Kearney, who noted the trend last week.

Tax refund season starts early. As of Feb. 14, the IRS had processed 31.3 million refunds, averaging $3,211, the agency said. As of April 18, it had sent out 94.8 million refunds, averaging $2,686, up about 1 percent in number and size compared with April 19, 2013, it said.

Consumers have been warned against getting tax refund anticipation loans, or RALs, by everyone from the Consumer Financial Protection Bureau to the Center for Responsible Lending because RALs often carry high fees. Capital One even lists RALs under the category “Types of Credit to Avoid” on its Web site’s financial education pages.

But there’s nothing wrong with making conventional auto loans to used-car customers who have a little extra cash at tax refund time -- provided that dealers and auto lenders are confident those customers can afford to buy a car.

Analysts expect delinquencies and defaults to increase slightly this year, but that’s from really low levels. The numbers suggest that, on average, there aren’t a lot of abuses going on.

You can reach Jim Henry at autonews@crain.com

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