Like real estate, a car is one of the biggest investments you will make as a consumer. Many try to save up for a car so they can walk out of the dealership debt-free, but for many of us, buying a car means taking out a loan and spending the next year or so paying off our debt.
The most popular loan for this instance is an auto loan, which you can shop around for in banks and lending companies. It’s highly recommended that you browse as many auto loan options as you can to find the best deal since you might be missing out if you only choose one or two lending businesses.
But one option people ask is: “Can I buy a car with a credit card?” For some, it makes a lot of sense: if your credit limit allows you to pay for a new or used car, why wait for a loan approval when you can use your credit to pay for a car instead?
So, can you buy a car with a credit card? The simple answer is yes, you can. Some dealerships may allow you to pay in full or partial payment with your credit card. But there are several reasons why you shouldn’t.
Your Credit Limit
The average price of a car is $36,000 as of 2019, and it’s expected to go up with inflation. This means that if you have a credit limit of $5,000 and no outstanding credit card debt, your credit card could cover the price of your car. It’s still putting yourself in debt, but at least you don’t have to apply and wait for loan approval.
Some car dealers will allow you to buy a car with a credit card if it falls under your credit limit, while others will only allow partial payment to a certain amount.
Your Credit Card’s Interest
Unlike auto loans that are designed to make car payments easier and more feasible in the long run for the average consumer, most credit cards don’t work that way. This is because the interest of an auto loan (an average of 5.27% on 60-month loans in the US) is much lower than the interest of a credit card (an average of 17.89%).
It wouldn’t be a problem to buy a car with a credit card if you have actual money on-hand to pay for it immediately. If you can pay it within the first credit cycle, then the interest you pay isn’t that significant. The problem, however, is when you buy a car with a credit card and then try to treat your payments like an auto-loan instead of credit card debt.
Let’s say you bought a cheap second-hand car at $10,000 and paid for it with a credit card at 16.99% APR. It took you 60 months to pay off the car, and over that time, you also paid an extra $5,000 in credit card interest. Had you applied for an auto loan instead, your interest would have been much lower.
Your Assets Are on the Line
Do you know the difference between defaulting on a car loan and defaulting on credit card debt?
Auto loans are secured loans, which means that you’re putting collateral on the line in case of failing to pay your loans. In this case, it’s the car, which they may repossess and sell to make up for your missed payments. Failure to pay will also affect your credit score, which can affect your ability to take out another loan, rent, or even find a job.
When you don’t pay your credit card, your credit score will drop, and eventually, your credit card company will sell your debt to a collection agency that will hound you for payment. If you don’t budge, they can sue you and legally deduct a portion of your wages until your debt is paid. If that’s not enough or you don’t have a job, the court can legally freeze your bank account and put a lien on your house and assets (including the car you bought).
Better Financing Deals
Although you’re legally allowed to use your credit card to buy a car if your credit limit and your car dealership allow it, credit cards aren’t made for car purchases. If you’re looking for a better deal, you’re much better off finding a car loan from a lending company or getting financing deals offered by car manufacturers.
Car loans and financing deals are more suited to those buying cars, so long-term payment is doable for the average person. You’re more likely to find a zero-percent 60-month offer from a car loan package or financing deal which is much more feasible than a zero-percent one-year offer most credit cards can give.
Why Don’t Car Dealers Take Credit Cards?
Some dealers may refuse to accept credit cards, so buying a car with a credit card may not even be an option. There are plenty of reasons behind this.
When businesses accept credit cards, they’re paying the card issuer up to 4 percent of every transaction they process. As a result, some businesses charge customers a credit card surcharge to offset the lost profit. Some states are not allowed to do this, however. Instead, they either increase the prices and offer discounts to those who pay in cash, allow limited partial credit card payments, or choose not to accept credit card payments.
Most credit cards have chargeback rights that, when it comes to cars, can put car dealers at a disadvantage. Just by placing a transaction dispute, the dealer may not receive payment from the credit card company and can be delayed for a long period of time, especially if the customer is being difficult about it. As a result, car dealers may not want to be bothered by the risk and simply either deal with cash payments or loan payments.
When You SHOULD Use a Credit Card to Buy a Car
That’s not to say there’s no reason to use a credit card to buy your car. If your reason for using a credit card to buy a car is simply because you want to skip the process of applying for an auto loan, then this is not the financially smart choice. But as long as you have the money to pay for a car immediately, here are the reasons why you should use a credit card.
For Cash-back Rewards
Some credit card packages allow for bigger savings if you pay with your card than with cash or a loan, as a credit card may give cashback for larger purchases. Why not take advantage of your credit cards that offer cash-back or reward programs by using it to pay for your car, reaping the points, and then either earning cash-back or rewards that can give you additional advantages?
Of course, this will only work if you have the money to pay off the entire car immediately. Earlier, we mentioned an example of how buying a $10,000 car can lead to an additional $5,000 in interest fees if it takes a credit card holder 60 months to pay for their car with a credit card. If you can’t pay for the car immediately, the interest fees will outweigh whatever you earn from cash-back or the rewards program, so it isn’t really worth it.
Before doing this, however, be sure to check the fine print of your credit card and see if this purchase will make the most out of your rewards. Some credit cards do not offer points for motor vehicle purchases, while others may limit the number of points you can collect in a month. If you’re already reaching that limit thanks to your other credit card purchases, it’s much better to wait for the next credit cycle to get the most points from your car purchase.
Buying a Cheap Used Car
The cost of a good used car normally starts at $1,500, which isn’t much when you consider the average price of cars. If it’s a low-cost car that shouldn’t take long for the average person to pay off, there shouldn’t be a problem paying off that car plus interest even if it takes multiple payments. Think of it the same way you would buying an expensive appliance and paying it off the same way.
Zero-Interest Credit Cards
Some credit cards offer 0% APR on purchases as long as you can pay it within a certain amount of time (usually 12 to 18 months). If we take out a $10,000 car example, this means if you can pay off the car within 18 months, you do not have to pay any interest.
The problem here is trying to estimate how much you can afford. If you know you can pay $10,000 within 18 months, this won’t be an issue. But if you overestimate how much you can pay and still have a balance after 18 months, you will have to pay the remaining balance plus the interest rate your card normally charges.
With this, it’s important to really crunch the numbers, think realistically, and factor in emergency expenses that could hinder your ability to pay. Many car buyers do this thinking they can pay off their credit card debt for their car within that zero-interest time period, only to encounter accidents or unexpected costs that delay their ability to pay. As a result, they end up missing their deadline and paying for the remaining car payment balance on top of the high interest.
Can you buy a car with a credit card? Legally, you can. But if we’re talking about whether you should, that’s a completely different matter.
Unless you’re buying a cheap used car, have a zero-interest credit card, or have the means to pay for the car quickly, then it should be fine to use your card. But if you’re planning on treating your credit card debt like something of an auto loan, the more financially smart solution would be to apply for an auto loan instead.