You get a mailer for a new credit card offering a superlow introductory interest rate, and you wonder about transferring your car loan and its higher interest rate to the card. It’s an idea that sounds like a good one on the surface, but using a credit card to pay off your car loan could cause financial headaches down the road. Let’s take a look at the pros and cons.
There are two big advantages to transferring your car loan to a balance transfer credit card. The first is what probably attracted you to the idea in the first place: a lower interest rate than you’re currently getting on your car loan. The second is that if you transfer the balance, you are effectively paying off the lender, which means it’ll release the lien on the title and you’ll own the car outright. It also means it can no longer be repossessed. However, keep in mind that if you are concerned about having your car repossessed, you probably don’t have good enough credit to qualify for the zero or superlow introductory rate on a new credit card anyway.
While a lower interest rate is very appealing, remember that these offers are introductory. That means they have a set length of time, typically 18 months or less. If the length of time is significantly different from the terms of your loan, it could result in a higher monthly payment, though it would save on interest. For example, if you had two years and $10,000 left on your new-car loan at 4.12 percent (the average interest rate on a five-year new auto loan in late June), your payments would be $434.78 monthly for the next 24 months, resulting in $434.80 in interest for that time period. If you transferred that balance to a credit card with a zero percent interest introductory rate for the next 18 months, your payments would be $556. That’s $121.22 more per month for $434.80 savings, shaving six months off your payments.
Keep in mind as well that frequently there are penalties for transferred balances not paid off by the end of the introductory rate period, and those penalties often mean paying a double-digit interest rate on the entire balance. If you face that, then you could easily negate all your savings and possibly even increase costs in the long run.
One more thing to think about is your credit score. By replacing your car loan with a credit card, you are likely to cause an increase in your credit score, which could affect your rate on any loans for which you apply. This is because car loans — so-called installment debt — have less impact on your credit score than credit cards. Credit card debt is considered revolving debt and is considered riskier by credit-scoring companies. In addition, the credit card is new and will have little or no payment history, which raises eyebrows more so than a card with a similar balance that you have had and made on-time payments on for a long time.
If you do decide to transfer your car loan to a credit card with a low introductory interest rate, double-check that the credit card company offers that option for a car loan. Not all do. And, make sure you feel you understand the requirements to get the introductory rate with no penalties. In addition, double-check that the lender who holds your car loan doesn’t have any penalties for paying off the loan early.
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