You can use credit cards to pay for pretty much anything these days, but cars are one big exception. Many dealers won’t even look at a credit card, and dealers who do accept them place serious limitations on auto purchases.
As a buyer, it’s better to stay away from credit cards, even if it means waiting for that dream car.
Why you might want to use your credit card… and why you shouldn’t
If you lack savings or financing options, there can be some strong motivations for buying a car with a credit card. Let’s explore three of the most common situations and why cards are not the best choice.
- You’re low on funds and need transport right away: If you don’t have the funds for a down payment, taxes or fees right now, it might not be the right time to make a big investment. Credit cards can cover costs in the short term; however, if you don’t expect to have a steady income to get you back on track, they can have a very negative impact. You could hurt your credit score and be saddled with skyrocketing interest payments.
- You think a credit card’s lower interest rate might be better than accepting dealer financing: Credit card rates are not always what they seem. With added fees and features, a low rate could quickly turn into a high-interest financing option. Even if the auto dealer’s financing option has a higher interest rate than your credit card rate right now, the dealer’s option may be better over time. Because the dealer’s rate is locked in, you know exactly how much you will be paying on a monthly basis.
- You already have bad credit: If your credit is listed as fair to bad, chances are you had trouble getting a credit card in the first place. The card you have probably has a lot of restrictions, like a prepaid deposits and a high interest rate. These credit cards also set a much lower credit limit, usually well below anything needed for a down payment on a car.
Additionally, many states have laws preventing buyers using unsecured debt for car purchases. Even when credit cards are allowed, dealers may still be opposed to paying igh fees to credit card companies, and may impose a limit on the amount they’re willing to charge to the card. These limits can be as low as $5,000.
Still not sure whether you want to put your car on your card? At least make sure you’re getting sumptuously rewarded.
Credit card alternatives
You have a myriad of other great options to buy a car, including the following:
- Dealer financing: The in-house option usually requires a down payment. The dealership’s financing company sets terms and handles monthly payments.
- Auto loans: With a loan, the full amount is paid to the buyer, who then pays the dealer at the time of purchase. The buyer will owe her bank or financial institution, not the dealership. Some banks offer special promotions like lower interest rates or longer repayment schedules, but full repayment may include additional costs, calculated as the annual percentage rate (APR).
- Cashier’s check: This is a convenient way to buy a car if the transaction is between owners, but cashier’s checks may also be accepted at auto dealerships. For this type of payment method, check with your bank about related fees.
Two big exceptions
Used cars sell for far less than new automobiles. Sometimes, the price is so low that it falls within the charge limit dealers impose on credit card purchases.
Luxury vehicles are another exception. Above a certain price point, dealers might be happy to eat the credit card company’s processing fees in exchange for selling an expensive model.
When it’s time to buy your next vehicle, leave the cards at home. With so many great financing and payment methods, make a smart decision.