If you’re thinking about buying a car, you might be curious about whether you can pay for it entirely using a credit card or only partially, like the down payment. However, different vehicle dealerships have different policies on accepting credit cards for car sales, and some may not accept credit cards at all. While using a credit card to purchase a car may have certain benefits, it’s important to weigh the potential interest expenses and damage to your credit rating if you can’t make the required payments on time.
While some vehicle dealerships could let you pay with a credit card to purchase a car, you should proceed cautiously with this choice owing to the dangers involved. However, it’s more typical for dealers to just take credit cards for a fraction of the total purchase price, such as the down payment. Additionally, some dealerships do not accept credit cards because of the expenses the dealer pays for credit card processing. These charges, which normally range from 1% to 3.5% of the transaction value, can add up quickly on large purchases. Dealerships sometimes offer alternate payment types such as cash, money orders, personal checks, cashier’s checks, and ACH transfers to avoid these fees.
Important factors to think about when using a credit card to buy a car
1. Credit ceiling and credit usage
The maximum you can charge is determined by the credit limit on your card. You might not be able to use your card to buy a car if your credit limit is insufficient to avoid going over. Additionally, reaching the credit limit on your card might have a negative effect on your credit usage ratio, which measures how much of your available credit you are really using. Your credit scores may suffer if your ratio is high.
2. Exorbitant Interest Rates on Credit Cards
Usually, credit card companies charge high interest rates. The average APR for a credit card was 16.28% as of November 2020, while the average rate for a 48-month loan for a new car was 4.95%. You can end up spending more in interest with a credit card than you would with an auto loan if you can’t pay off the purchase right away and only make minimum payments. It’s important to keep in mind that if you can pay off the balance prior to the conclusion of the promotional period, utilizing a new card with a 0% introductory APR can be advantageous. But if you don’t, the remaining debt will continue to accrue interest at the standard rate.
3. Reward Possibility
When making large purchases like a car, using a rewards credit card can help you meet spending requirements to earn bonus points while also racking up extra rewards points or airline miles. However, this strategy only works if you can pay off the credit card bill in full and earn enough rewards to cover any annual fees. Otherwise, the fees and interest costs could outweigh any incentives obtained.
Other options for purchasing a car without using a credit card
If buying a car with a credit card is not the best course of action for you, you may want to consider the following:
1. Auto Financing
When compared to credit cards, choosing car finance through an auto loan often entails lower interest rates. An online auto loan calculator will help you estimate the monthly payments and interest rates. There are lenders who specialize in working with people in similar situations, even if you have a low credit score.
2. Co-Signer
Having a co-signer with strong credit can increase your chances of approval for an auto loan and help you get a better interest rate if you’re worried about doing so.
3. Cash
While paying cash may restrict your selections to less expensive cars, saving money and buying a car that fits within your means is frequently the better course of action than putting your financial stability at risk by purchasing a car on credit that you can’t afford.
4. Trade-in
Consider trading in your current vehicle and using the trade-in value as a down payment on a new vehicle if you presently own one.
Conclusion
Take the time to carefully weigh the advantages and disadvantages of each payment arrangement before you buy your next car. If you choose to pay using a credit card, whether for the entire transaction or only a portion of it, you must have a strategy in place to pay off the balance as soon as possible to reduce interest payments. Take the time to look around and compare offers if you decide to pursue auto loans to make sure you get the best bargain. Prequalification is a service provided by many lenders that enables you to view predicted interest rates and loan terms without affecting your credit rating. Pre-qualification is not a promise; therefore, be aware that after you submit a complete application, the rates and terms can vary.