Dealers may accept your credit card, but that doesn’t always mean it’s a good idea to use it to cover a down payment on a car.
Cars Loans and Credit Cards
If you’ve been considering using a credit card to cover a down payment on a vehicle, it isn’t generally recommended.
First, let’s consider the auto loan that you’re looking to get into. Car loans are installment loans, and they’re almost always simple interest loans, which means you’re charged interest daily on the balance of the loan.
This is why putting down a large down payment on a vehicle is a great idea for anyone, since when you finance less, there’s less principle that interest can be charged on. However, using borrowed money (a credit card) to make a down payment to finance the car (more credit) may not be the best idea. In fact, it may not even be possible!
Down Payments and Credit Cards
You can put cash down to lower your monthly vehicle payment, decrease the amount you’re financing, shorten the loan term, and save on interest charges. By using a credit card to make your down payment, you’re decreasing the amount you're financing from the auto lender but not the total amount you’re borrowing.
It’s simply because you put the down payment amount on your credit card, and you must pay interest on it until it's paid off. If you were intending to use a down payment to lower your car payment each month, you’re also paying for the vehicle on your credit card now. This doesn’t exactly free up any disposable income each month, since you’re now making payments on the credit card along with the car payment.
Think of it as shifting the auto loan to another place – it still exists and you still owe that amount. Depending on the interest rate you’re charged on your credit card, you could even be paying more for the car.
Meeting a Down Payment Requirement With Cash
As a rule, credit card interest rates tend to be higher, on average, than traditional auto loans. If this is true for you, then you’re going to be paying more for the vehicle in the form of interest charges on your credit card.
Using a credit card for a down payment speaks to the mentality of “I’ll worry about it later, I need the car now,” and convenience is a strong argument. However, you need to keep in mind that many lenders and dealerships may not even allow you to use a credit card for a down payment. The more a lender or dealer sees that you’re relying on additional credit, the more you may be lowering your chances of an approval.
To save the most cash, stress, and hassle, it’s in your best interest to simply save up the cash for a down payment. Not only does this save you money in interest charges, but cash is king, and it's always going to be accepted anywhere.
If you’re working with a bad credit auto lender (a subprime lender), you’re likely to be asked to have a down payment of at least $1,000 or 10% of the vehicle’s selling price.
Again, down payments can be hard to save for. Luckily, you can use trade-in equity to help cover all, or part of, the down payment amount, since it doesn’t have to be all cash.
Bad Credit Auto Loans
While this may not be the answer that everyone wants to hear, saving up the cash for a down payment is one of the best things you can do to start your auto loan off on the right foot. With a large down payment, you’re lowering the amount you’re financing which saves you money down the line, while also lowering your monthly car payment.
Rushing into an auto loan with a credit card instead of a trade-in or cash probably won’t save you any money over the course of your car loan. Vehicles are big purchases, so take your time, look for the right lender, work on your credit, and save up a little each month for a down payment that benefits you in the future.
While meeting a down payment may be one of the most difficult things to do, another hurdle to overcome is finding a lender that can work with you if you have bad credit. Many traditional auto lenders turn away borrowers with less than perfect credit scores – enter subprime lenders! These lenders work through a dealership’s special finance department, and they work with all types of borrowers.
Here at Auto Credit Express, we have connections with dealers across the country that work with bad credit lenders. To get matched to a dealership in your area, fill out our free car loan request form.