Using credit cards regularly can pay off when you consider benefits like earning points, cash back or building your credit score (assuming you pay your balance on time). Since a car is the second largest purchase for most people only behind a home, some car shoppers wonder if they should pay via credit to reap the rewards. Maybe it'll get them enough miles for that much-needed vacation or a nice chunk of change through the cash back rewards. See whether you're allowed to pay for a car with a credit card, the risks vs. rewards, and some tips if you choose to pay with plastic.
Will The Dealer Accept a Credit Card?
The most common ways to buy a vehicle are with cash, check, or the dealer or the bank's financing. Putting the purchase on a credit card is less common and dealers often don't offer this option because of the transaction fees they must incur from processing the transaction. If you're considering paying for your new or used vehicle with a credit card, the first part of the equation will be to determine if the dealership allows it.
Some dealers will offer the option to make a partial payment up to a certain amount with credit (the first $5,000, for example). The restrictions will vary from dealer to dealer, so you should do some research online or make a call to find out if it is allowed before you go in to buy. Make sure you're aware of the credit limit on the card you're planning to use so you don't exceed it.
Risks vs. Rewards
Even if you learn the dealership you're buying from will allow you to make payments by credit card, it will not always be the best route. Take a look at your personal situation before handing over the plastic.
If your credit card comes with excellent rewards, but also high interest rates, the interest can quickly add up and cancel out any benefits the rewards offer. If you can pay off the balance right away, this isn't a concern but if you plan to carry it for a while, charging your car payment is not for you. As an example, according to the Balance, if you charged a $10,000 vehicle on a credit card with a 17.49% APR and it took you 5 years to pay off, you will end up paying over $5,000 in interest. At over half the purchase price of the vehicle, the high interest is likely not worth the rewards. Putting the large car purchase on your credit card can also substantially increase your debt to income ratio and hurt your credit score and chance of getting a loan in the future.
On the other hand, if you have the cash to pay off your balance right away and earn the rewards, you can get a nice rebate in the form of cash back after your car purchase. In addition to getting money back, you can save time by bypassing the hassle of applying for a loan and waiting for approval or getting a check from the bank.
Another reason to use a credit card is if you're looking to buy an inexpensive vehicle and it won't take you several years to pay it off. In this case, you can get a balance transfer card with a 0% APR and as long as you pay within the designated time frame of the introductory offer (18 months, for example), it is the equivalent of getting a 0% interest short term loan.
Tips for Buying a Car with a Credit Card
If you're thinking about using a credit card to pay for your vehicle because you were not able to qualify for a car loan, you should reconsider. There is a high chance of getting buried in debt from the high interest rates that come with credit cards and unless the purchase is an inexpensive car that you plan to pay off quickly, this route is likely not best for you.
Even if you go for the 0% APR introductory offer as mentioned above, it's often not worth taking on the risk of missing the timeframe to pay off the balance and getting hit with the interest rates later. Only proceed if you're confident you have the cash to pay off the balance right away. Another option is to put just the down payment on your card so you're getting some points or cash back, but aren't struggling to pay off the balance for the full vehicle.
You can also look into applying for auto rewards credit cards which can get you even better deals. Brands like GM, Toyota and Chrysler offer reward cards to their car buyers. Finally, when you're negotiating the price of the vehicle at the dealership, don't discuss your method of payment until you agree on a price. When the salesperson hears you're paying with credit, they can raise the price of the vehicle.