Bloomberg/Getty ImageWhy go through the hassle of applying for an auto loan when you have a credit card in your wallet with a $20,000 limit?
It sounds so logical: You can just slap the plastic on the dealer’s desk and drive off into the sunset, earning valuable points as you do. So, can you buy a car with a credit card? It’s possible. But probably something you should think twice about. Here’s why.
Little dealer interest, high interest rates for you
For starters, most dealerships won’t allow you to use plastic for the entire purchase price of the car. Perhaps they’ll let you cover a few thousand dollars of the purchase on a card.
But the vast majority prefer more traditional financing—if only to avoid the fees they’d incur for processing a credit card transaction or the chargeback risks they might face if you later decided you weren’t satisfied with the purchase and chose to contest it.
Even if you find a dealer who will let you use a credit card, you’ll probably prefer an auto loan too. The reason: A traditional auto loan will almost certainly carry a much lower interest rate than any credit card you have in your wallet. The average APR for a car loan is slightly more than 4 percent for a 60-month term. By comparison, the average APR on typical credit cards ranges anywhere from 13 to 23 percent.
When it makes sense… and when it doesn’t
There are a few boxes you should check off if you decide to buy a car with a credit card. Your card should offer a zero percent introductory rate, and provide substantial reward points. You should have good credit, and have the cash on hand to pay off the card as quickly as possible within the introductory window.
If your credit card has a high interest rate or you have a sub-optimal credit score, then a credit card isn’t the right option for you. It’s not a good idea if you’d prefer to take five years to pay off the balance, as with a standard auto loan. This is especially true if the reason you’re considering using a credit card is because you don’t qualify for more traditional financing.
It’s important to note that many credit card companies limit how many reward points or cash back deals they’ll give you—and big-ticket purchases such as cars may not qualify for reward points in the first place. It’s important to read the fine print related to rewards in your credit card agreement.
When using a credit card, do the math
But if your card is generous with its points and has a long window of zero percent interest—and if you have good credit and plenty of cash on hand—buying all or part of a car with a credit card may be something to consider.
But it’s important to do your homework and think through just how many points you’ll receive. It may seem like a lot at first glance, but once you crunch the numbers it is possible that the dealership offers special financing deals that are worth even more.