Most lenders don’t accept credit cards for auto loan payments, but even if your lender does, you need to think twice before using that option. If you aren’t careful, you could end up paying more than your original auto loan amount.
But I’ve got your back! Up ahead, we’ll cover everything you need to know so you can decide what the best option is for you:
[Read: Best Rewards Credit Cards.]
How to Make a Car Payment With a Credit Card
There are several ways to pay with a credit card, even if your lender doesn’t accept cards directly. Let’s take a look at each one:
Rewards Credit Cards.
According to a 2021 report, ” U.S. Auto Loans Market Size and Household Spending Report,” Americans with auto loans pay an average of $412 per month.
Since monthly payments can be high, it’s tempting to use a credit card to earn all those rewards. But before you start packing for Bora Bora, you should know that most lenders won’t allow a direct credit card payment on an auto loan. And even if they did, there would likely be a convenience fee.
This fee is a surcharge that a lender makes you pay for the convenience of using a credit card. The fee typically costs 2% to 3%.
You really don’t want to pay more for your car than you already are, right? But if your car dealer accepts credit cards, there’s another option to try.
Credit Card With a 0% Introductory Purchase APR
You could bypass the loan process altogether and buy a car with a credit card that offers a 0% introductory purchase annual percentage rate. This approach allows you to make interest-free payments using your credit card. These cards have introductory periods that range from about 12 to 18 months. But you’ll need a high enough credit limit to cover the cost of a car, plus you have to find a dealer who will accept a credit card as payment for the entire price.
If you think you can pay the loan off in that time frame and you have very good credit, it’s something to consider. But again, convenience fees might pop up.
Warning: If you miss a payment, you could lose the 0% APR. The regular rate will be much higher, so this isn’t recommended unless you’re on top of your payments.
Balance Transfer Credit Card
It’s also possible to transfer your car loan to a balance transfer credit card. Let’s say you have a $10,000 auto loan. If you have excellent credit and can qualify for a balance transfer credit card, you could transfer the loan amount to a credit card.
Balance transfer credit cards offer a 0% introductory purchase APR for a period of time, usually 12 to 18 months or so. So, this is another opportunity to make interest-free payments using your credit card. But on the downside, you might have to pay a balance transfer fee of 3% to 5%.
Of all the ways to make a car payment using a credit card, this option is one of the worst. Here’s why: You often have no grace period, so your card issuer begins charging interest right away. And you’re not paying interest at your purchase APR. No, it’s at a much higher cash advance APR. Some cash advance APRs can be 25% or more.
Aside from a high APR, there’s also a 3% to 5% cash advance transaction fee. As you can see, this is a costly way to make an auto loan payment.
Technically this is an option, but there are downsides. Companies that offer this service, such as Western Union, have relationships with participating businesses. So you could fund your payment with a credit card via Western Union or a similar money transfer business.
The reason to avoid this? It could be treated as a cash advance by your credit card issuer. If this is the case, then you’re looking at transaction fees and a high APR on the amount transferred.
Pros of Making a Car Payment With a Credit Card
If you have a high credit score and high limits on your credit cards, you might be able to use a credit card for payment and limit damage to your credit score.
Also on the positive side, if you use a credit card that has a 0% introductory APR, you can pay off your debt paying no interest. You have to factor in transfer fees, but the interest savings could make it worthwhile. There’s also the chance of a large amount of rewards you could earn if you use the right rewards credit card.
But before you make the leap, be sure you understand the downsides because there are quite a few to keep in mind.
[Read: Best 0% APR Credit Cards.]
Cons of Making a Car Payment With a Credit Card
I’ve already mentioned convenience fees, but there are two more downsides to consider before making your auto loan payment with a credit card.
— Potential for getting into debt. If you’ve transferred your loan to a balance transfer credit card, your goal is to pay the debt off before the introductory 0% APR ends. Life is unpredictable, so if you experience a money crisis, such as losing your job, you might have trouble making the monthly payment you need in order to finish paying off the balance by the end of the intro period. And if you miss making minimum payments, you could lose your 0% rate and end up paying compound interest at a much higher APR on your balance.
— Possible drop in credit score. You have a credit utilization ratio, which is the amount of credit you’ve used compared with the amount you have available. When your credit card balance exceeds 30% of your credit card limit, your score usually goes down. If you’re willing to survive the temporary drop, that’s fine. Just make sure you won’t need to apply for credit in the near future. Wait until your credit score improves so you won’t get hit with high interest rates on new credit.
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