Credit cards can be a blessing. They give you the ability to make large purchases without having to prepare a fund in advance, as well as get through emergencies. If a dealership allows it, you may be able to charge a down payment to a credit card. But it varies from dealer to dealer, and there may be limits on how much you can charge. 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.
Ask yourself this question: will you be able to afford the monthly credit card payments in addition to the monthly car payment and other expenses that will come with ownership? Credit cards typically charge higher interest fees than an auto loan, and that can end up being a curse.
Unless you know for sure that you can pay off the entire amount you placed on the credit card in a matter of weeks, it would not be advisable to add this much to your overall debt while lowering your credit score by using too much of your available credit.
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.
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 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.
Better Ways to Raise a Down Payment
Instead of running up a balance on a credit card, there are other methods you should explore first.
- Trade in your previous vehicle. If you have a car that you currently own, it is worth having the dealer take a look at it, even if it isn't in the best shape. You never know, it may just be enough to cover a minimum down payment requirement.
- Do you need that car right now? Don't let that available credit go to your head. Is it possible to wait a few weeks longer and take that extra time to save up the funds for a down payment? Using that credit card has a bigger potential to cost you more in the long run than having a little patience.
- Is there a friend or family member that can help you? If you know someone who has the ability to lend you a small amount to cover a minimum payment in order to get auto loan approval, you might be able to work out an arrangement with them to pay back the loan with minimal interest.
There Is Another Choice
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.
If you think an auto loan isn't a possibility for you, think again! Auto Credit Express wants to find you a car dealer. We know that not everyone is able to financially prepare for a sudden replacement of a vehicle, and we have a network of dealers who specialize in situations like yours.