Find out how to use a credit card to buy a car and what other options you have.
When looking to but a car, you’ve got a few different options. They can include and are not limited to, a personal loan, car loan or lease agreement. There’s also the option to use a credit card — although there are a few ways this should be done to minimize interest.
With low interest rate promotions everywhere in the market, a credit card may be the ideal option for paying off your new car. Credit cards carry risks however, so it is important that you take the time to figure out if a credit card is really the most suitable option for financing that new car.
How to buy a car with a credit card
The main way to pay for a car purchase is to use a low interest rate or 0% offer credit card with a large credit limit.
You can pay off the balance gradually without the hefty charges associated with a regular credit card or personal loan. If you can’t pay the car off within the promotional period, you can either transfer the balance over to a loan or to a card with a low or 0% interest rate.
You could theoretically continue to balance transfer the remaining balance to a new card each time the promotional period ends, but there are a few drawbacks to this method.
When you transfer a balance over to a new card you’ll only be able to transfer a certain percentage of your total approved limit. This is usually around 90% of your approved credit limit.
Every time you apply for a new credit card your potential card provider will check your credit file. These checks or ‘credit inquiries’ are also recorded on your credit file. Too many credit inquiries at any one time may be a red flag to lenders.
Other things to consider when buying a car with a credit card
- Annual fee
Many credit cards come with annual fee, so you’ll have to factor this into your equations when working out how much this method of buying a car will cost you.
- Credit card surcharges
Some car dealers will charge a surcharge for purchases made using a credit card. A surcharge of even 3% on a purchase of $10,000 is a whopping $300. Also, keep in mind that a loan can come with an application fee, so compare the two costs before coming to a decision.
- Be aware of promotional periods
A credit card offer such as a low purchase rate or balance transfer will end after a certain number of months and when this happens the rate will revert to the standard variable purchase rate or the cash advance rate.
- Rewards points
If you’re making a big purchase with a credit card, you might be able to earn rewards points on it. Be sure to compare the value of the rewards points with the interest you may pay. Interest charges could seriously reduce the value of any points.
- Could limit your cash flow
Because your credit limit will be strained with the car purchase, you may have less credit to go towards paying off your bills and other expenses if that is what you usually use your credit card for.
How else can you finance a car purchase?
There are many other ways of financing your car purchase and they should all be considered so you can walk off of the car lot feeling like you got the best deal.
When you get a car loan, the car that you are planning to buy is actually used as security for the loan. If you can’t meet all of your loan obligations for payments, the lender has the right to seize your car. The interest rates are usually lower on this kind of loan since it has been secured to an asset.
When you take out a personal loan to purchase a car, you have to make regular payments like you would with any other loan. You can spread these repayments out anywhere between one to seven year. You can either get a secured or unsecured personal loan to use as car finance, and this will influence both the interest-rate and how much you are allowed to borrow.
Getting a lease for your car finance is a lot like renting, but you will be given an option to buy it when the lease has expired for a residual. A residual is a percentage or value that has already been agreed upon when the car was first purchased.
Do your homework
Even if the credit card option turns out to be the most suitable one, credit cards do not offer much protection in the event that you miss a payment or pay late. In fact, credit cards will often heavily punish you for a missed or late payment. A credit card may save you money on your car purchase, but if not managed correctly, credit cards can also get you into trouble.