The idea of buying a car with a credit card might seem appealing, especially if you're eyeing those rewards points, cashback, or miles. However, this method of payment is not as straightforward as it may appear. In this guide, we'll delve into the various aspects of using a credit card to purchase a vehicle, including interest rates, down payments, dealership policies, and more. We'll also explore the benefits and drawbacks, and outline alternative payment methods.
Understanding dealership policies on credit card payments
First and foremost, it's essential to recognize that not all car dealerships allow customers to purchase cars using credit cards. Those that do may have restrictions in place, such as limits on the amount you can charge to your card. Some may only allow a downpayment. This is largely due to the transaction fees that dealerships must pay for credit card processing, which can cut into their profit margins.
Interest rates and financial implications
One of the most significant considerations when thinking about buying a car with a credit card is the interest rate. Credit card APRs (Annual Percentage Rates) are typically much higher than those of auto loans. If you're unable to pay off the car purchase balance within a short period, you could end up paying a substantial amount in interest, potentially making the car much more expensive in the long run.
Benefits of using a credit card
Despite the potential downsides, there are some benefits to using a credit card to purchase or finance a car:
Rewards points, cashback, and miles: If your credit card offers these perks, you could earn a significant amount of rewards on the purchase of a vehicle.
Purchase protection: Many credit cards offer additional protections, such as extended warranties or insurance against theft or damage, providing extra peace of mind.
Building credit: Making a large purchase and paying it off promptly can help build your credit score, provided you manage the debt wisely.
Drawbacks to consider
Processing and other fees: Some dealerships, if they’re willing to take a credit card for part or all of the transaction, may charge a service fee. Those fees can start at 3% or higher, so it’s a big chunk of unnecessary money you’re adding to the total cost of the car.
High interest rates: Interest rates on credit cards can be considerably higher than those of auto loans, leading to increased costs if the balance isn't paid off quickly.
APR vs. car loan interest rates: Many people don’t realize these are two different things. There’s the interest rate to borrow money to finance the car (the car loan interest rate), but the APR - annual percentage rate - takes into account other lender fees. So be sure you’re comparing APR to get the best idea of your actual costs. If you’re using a card for a portion of your car purchase, you need to factor in the APR as well as any credit card fees and interest rates.
Impact on credit utilization: Charging a large sum like a car purchase to your credit card can significantly increase your credit utilization ratio, potentially harming your credit score. Credit card interest rates can be 22% or higher.
Limited dealership acceptance: Not all dealerships accept credit cards for car purchases, and those that do may impose limits on the transaction amount.
Alternative payment methods
Given the complexities and potential drawbacks of using a credit card to buy a car, it's worth considering alternative payment methods:
Auto loans: Often offering lower interest rates than credit cards, auto loans are a conventional way to finance a car purchase.
Personal loans: For those who prefer not to deal with auto loans, personal loans can provide another financing option, though the interest rates may vary.
Cash: If possible, paying cash for a car avoids interest payments altogether, making it the most cost-effective method in the long run if it makes sense for you to part with that capital.
When does it make sense to use your credit card?
There are specific scenarios where using a credit card to purchase a car could make sense:
Small down payments or partial payments: If the dealership allows it, you might use your credit card for a down payment or a portion of the car's price to earn rewards, provided you can pay off the balance quickly.
0% APR promotions: Some credit cards offer introductory 0% APR periods. If you can pay off the car purchase before this period ends, you could avoid interest charges altogether.
Emergency situations: In urgent cases where you need a car immediately and lack other financing options, a credit card can serve as a last resort. However, it's crucial to have a plan in place to pay off the balance quickly to avoid high-interest charges.
Buying a car with a credit card comes with various considerations and potential risks. While there are some benefits such as rewards points and purchase protection, the high interest rates and dealership restrictions make it an option that must be approached thoughtfully. Ultimately, the best choice depends on your financial situation, the terms of your credit card, and the policies of the dealership.
This blog post is provided "as is" [and should not be relied upon as a substitute for professional advice]. Some content in this post may have been created using artificial intelligence; however, every blog post is [reviewed] by at least two human editors.
