Car loan often better than plastic

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These days, people use credit cards to purchase just about anything — including automobiles. This week, I answer questions from two people considering purchasing a car on plastic.

As you’ll see, buying a car with a credit card can involve risks.

Dear Terry,
I am trying to decide whether to use a credit card or obtain an auto loan for the purchase of a relatively inexpensive used car (about $5,000).

I have a business credit card with a regular annual percentage rate, not introductory, of 7.9 percent, and the loan rates I’ve researched range from about 6.5 percent to 9.1 percent depending on whether I buy from a dealer or a private party. If I purchase the car with my credit card, I would make regular payments for as much as the loan payment would have been.

If I were to go with a traditional loan, I would opt for a five-year loan to keep the monthly payments low. I also would plan to pay off the remainder of the loan with a lump sum in about two years.

Do you have any advice about which approach to choose?


Dear Derek,
If you stick to your assumptions — and don’t miss any payments or have overdrafts that cause the credit card company to raise the interest rate to ridiculous levels — it may make sense to charge it.

But if you can get a five-year regular car loan at a rate lower than the credit card, that’s still the way I would go. That way, you would not use up your liquid credit on the card, leaving it open for use in emergency situations.

[[ Auto Loan Calculator ]]

Dear Terry,
I want to purchase a car with a credit card because I have poor credit. When I went shopping for a used car, the banks gave me a 15.9 percent loan rate. But to me that is way too high.

My parents gave me a credit card to use and I’d like to use it to purchase a used car. The credit card I have charges 5 percent. What do you think?


Dear Diana,
I’d double check that interest rate on the credit card. It’s unlikely that the rate would be that low if you were to take a cash advance to buy a car. Also, check the card agreement — many contain language that says the issuer can raise the interest rate considerably if even one payment is missed, which could make a car loan really expensive.

If you have a question for Terry, e-mail him at Driving for Dollars. Save money on your car — sign up for Bankrate’s new weekend Car & Money newsletter.