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Using a credit card to buy a car

Find out the pros and cons of using a credit card to buy a car instead of car loan, personal loan or other car finance options...

When would buying a car using a credit card make sense?

If your loan amount is less than $5,000, some lenders will suggest that you take out a credit card rather than a loan.

In the past, the high interest rate on a credit card would have made this a very expensive way to finance your new car, but over the last few years intense competition in the credit card market has forced rates much lower.

As a result, some credit card interest rates are lower than those of some car loans, making credit cards and option to consider.

So, can it make sense to use a credit card to buy a car?

Credit card catches

There are some differences in the way credit cards work compared to "normal" loans that you should be aware of up-front.

Interest Rates

While the low rate credit card market has taken off, there are still a lot of high interest rates out there too. Check your statement and compare the interest rate with car loan rates so you're making an informed decision.

Credit Card Surcharge

Vendors pay a surcharge when their customers make payments with a credit card, usually between 1.5% and 3% (sometimes more for Diners Club or American Express) for every transaction. In many cases car dealers will pass this surcharge on to you.

A 2.5% surcharge equates to $250 per $10,000 you spend and could be comparable with the application fee charged on some personal and car loans, which can be more than $300.

Cash Advance Fees

If the seller doesn't take credit card or you want to avoid the surcharge, you might consider withdrawing the available funds from your credit card via an ATM or from a bank branch. Most credit cards charge cash advance fees of between 1.5% and 2.5%, which would equate to $150 to $250 in fees per $10,000 withdrawn.

Higher Cash Advance Interest Rates

As well as cash advance fees, some credit cards (especially very low-rate cards) charge a different interest rate for cash advances than for purchases. Despite a headline rates as low as 9%, the cash advance rate can be as high as 20% p.a. Make sure you check the cash advance interest rate on your card if you're considering this option.

If you're thinking of paying the withdrawal back quickly, remember cash advances are not usually eligible for interest free days so you will attract some interest charges.

Cash Flow

Make sure you take into account how having a large purchase on your credit card will impact the way you manage your other bills and expenses.

You don't want to find yourself in a position where you're over your limit and struggling to pay your regular bills because you've put a whopping great car purchase on your credit card.

When it could make sense

If you have low interest rate credit card in your wallet with sufficient credit, you may not be worse off using your credit card to buy a car.

The illustration below compares $5,000 borrowed at 10% p.a on a credit card with a personal loan at the same rate. This assumes no other purchases are made on the card and the repayment amount on the credit card stays constant. The credit card is only $19 more in interest over four years.

An unsecured personal loan interest rate could be 13% pa or higher, which (if all else remained constant) would make the total interest paid on the personal loan $333 higher than the credit card over the period.

  Credit Card Personal Loan
Loan Amount (includes 2.5% credit card surcharce) $5,125 $5,000
Application Fee None $100
Annual Fee $50 None
Interest Rate 10% 10%
Period 4 years 4 years
     
If you repayed... $134.00 per month $126.81 per month
     
Total Interest Charges $1,106 $1,087
Total Fees (excluding penalty fees) $200 $100

Source: FinanzTools Loan Repayment & Credit Card Payoff Tools.

Special offers

In addition to low rate credit cards, some special offers can sound pretty tempting. Can they work for car finance?

Balance Transfers

If you've seen advertising for very low interest rates on credit card balance transfers(BT), you might be curious if you can benefit.

BT interest rate promotions usually last for the first 6 months from the time you are approved on a new credit card (although you may be able to find 12-month and 'for-the-life-of' deals).

The discounted rates only apply to amounts you 'rollover' from another credit card so if you did buy a car on one credit card you could transfer it across to another card to benefit from a low BT rate. However be careful of:

  • The term the low rate is for compared with how long you will take to pay the money back.
  • The 'go to' rate the BT will revert to at the end of the introductory period. This applies to the transferred funds you haven't paid off yet, and can be even higher than the purchase rate on some credit cards.
  • That the credit limit on the new card you are transferring the funds to is high enough, especially if you apply after you've already made the purchase.

Using your credit card to get the points

You might be considering using your credit or charge card to buy a car in order to get rewards points, and then paying it off immediately with cash or transferring the loan to another type of finance.

If the dealer passes on the credit or charge card surcharge to you it may cancel out the benefit of the points. For example, if you were paying $30,000 to the dealer and they passed on a 3% surcharge, this would equate to an additional $900 you would pay to get the points.

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