With each passing year, new technology and generational demand see people leaning toward a preference to pay for everything with credit cards. This is great because you can use them to purchase anything, including a car, and worry about paying later, right? Unfortunately, in most cases, the answer is no.
Many people think credit cards offer a great alternative to having cash on hand, or that they save them the headache of all the pesky paperwork involved in an auto loan. But this is simply not the case. Even though more and more dealers are accepting credit cards, it is often only for a small portion of your vehicle purchase, generally only up to $5,000.
Buy a Car on a Credit Card?
In truth, most dealerships do not accept credit cards for an entire purchase. It’s a rare occasion when they do, and it is typically only done through a specific credit card/dealer program. You will likely only be able to pay for a portion of your purchase with plastic if a dealer accepts it at all. This is typically because merchants must pay a transaction fee to the credit card company—usually between one and three percent—and most dealers are not willing to give up that profit margin.
Traditionally, it is only a good idea to use your credit card to pay for a car if you have good credit and the money available to pay off your purchase. It can make sense to put the purchase—either in whole or in part—on your card if the reward outweighs the risk. For example, if you have a credit card with a zero percent APR or a rewards card that will earn you things like points, airline miles, or cash back.
The Perks of Credit Card Car Buying
Paying with a credit card during a zero percent APR period can save you a bundle in interest charges on the purchase of your car, assuming you can pay it off in an appropriate amount of time. If you can't pay it off before interest charges kick in, you could wind up with more fees than you bargained for. This is due to the fact that credit card interest rates are usually much higher than those on auto loans.
If you are using a rewards card, you may be able to gain some nice perks for yourself, again, assuming you have the money to pay off the balance fairly quickly. For instance, some cards offer bonus points for certain dollar amounts spent within a certain amount of time. This could translate into hundreds of dollars in rewards.
Other cards offer cash back incentives for purchasing. Make sure the money is worth it though; a card that offers one percent cash back on every purchase is only earning you $50 if you charge $5,000.
The Bad Credit Buzzkill
There are some instances where you definitely should not do something just because you can. Paying for a car with a credit card is one of them, especially if you have bad credit. Even if you find a dealership that will allow you to place the entire purchase price of a vehicle on a credit card, you could be costing yourself thousands overall.
Credit cards typically carry an APR of between 12 and 25 percent, whereas auto loans currently range from about 4 percent to 12 percent, depending on your situation. Even if you fall into a subprime category, your auto loan interest rate—typically between 14 and 22 percent on average—will probably still be lower than your credit card rate. And if you can only make minimum payments (or can’t meet your minimum payment requirements), you could find yourself owing more than your car is worth.
One other downfall may include what could happen if your car is totaled or stolen. If this happens and your insurance company issues you a check smaller than the balance on your card, you are stuck paying that difference (there is no GAP insurance available for credit card purchases). Another thing to watch is your credit utilization ratio. Putting the cost of a new car on your card will substantially raise this, which could harm your credit score further.
A Better Option in the End
If you are having trouble qualifying for an auto loan, using a credit card for your purchase is not a good alternative, but there are others. One is Auto Credit Express and our network of dealers who specialize in assisting people with credit challenges. Our service is always free, and it is easy to begin. Simply fill out our online auto loan request form, and take the first step toward purchasing your next vehicle.
