Can I Pay A Car Loan With A Credit Card?

December 7, 2023

Did you know that the average Australian household has approximately $3,043 in credit card debt? Have you ever found yourself daydreaming about a world where paying off your car loan was as simple as swiping your credit card?

What if we told you that a plastic rectangle in your wallet could hold the key to transforming your monthly car loan payments into a breeze?

Well, this method could redefine the way you tackle the road to a financial loophole. In this article, we will talk about how you can use your credit card as an option to pay your car loan and get you out of short-term financial debt.

How Car Loans Work

Auto loans, like other forms of financing such as mortgages, are approved based on an assessment of the borrower’s financial situation. The lender reviews the borrower’s application, credit score, and overall financial health to determine their creditworthiness.

There are two types of auto loans: secured and unsecured.

1. Secured Auto Loan: This is the most common type of auto loan. In this case, the vehicle itself serves as collateral for the loan. If you fail to make the agreed-upon payments, the lender can repossess the car. This reduces the risk for the lender and often results in lower interest rate loans for the borrower.
2. Unsecured Auto Loan: Unlike secured loans, unsecured auto loans do not require any collateral. If you miss a payment, the lender cannot repossess your vehicle. However, failing to make payments can severely impact your credit score and may result in your loan being handed over to debt collection agencies. Lenders typically charge higher interest rates due to the higher risk associated with unsecured loans.

Getting an auto loan involves a series of steps that ultimately lead to the ownership of the vehicle. Here’s how the process typically works:

1. Apply for an Auto Loan: Start by applying for a loan with your chosen financial institution, which could be a national bank, local bank, credit union, or online lender. You can speed up the process by getting pre-approved, which involves a credit check and a formal loan offer before officially applying.
2. Creditworthiness Assessment: The lender assesses your creditworthiness based on your credit score, existing debts, late payments, and other factors in your credit history. Some lenders may also consider your banking history. Each lender weighs these factors differently.
3. Determine Loan Amount and APR: The lender sets the amount you can borrow and your Annual Percentage Rate (APR) based on your income, expenses, credit score, and debt load. Your down payment will also affect how much you can afford.
4. Car Loan Repayment: You repay the loan over a set term, typically between 24 to 84 months. The length of the loan affects your monthly payment and total interest paid. Shorter terms mean higher monthly payments but less interest paid overall. You can also refinance your loan to extend or shorten the term or improve your interest rate.
5. Ownership: After making regular monthly repayments and paying off the full amount of your car loan, you will own the car. You’ll receive the title for the vehicle, signifying your ownership.

Pros of Paying a Car Loan With a Credit Card

Credit cards can sometimes be a convenient option for making car payments. Here are some potential advantages:

1. Lower or No Interest Rates

Some credit cards offer 0% introductory rates. If you can pay off your car loan during this period, you could save a significant amount of money. Balance transfers usually incur a fee, and interest rates can skyrocket after the introductory period.

2. Flexibility

Unlike auto loans, which typically require full and punctual payments every month, credit cards often allow you to make minimum monthly payments. This flexibility can provide temporary relief if you’re in a financial crunch. However, it’s not a long-term solution and should be used sparingly.

3. Points and Rewards

If your credit card offers rewards, you might earn points, miles, or cash back by making your car payments with it. This can be particularly beneficial if you pay off your balance each month. Before committing, check to ensure car loan payments are eligible for rewards.

Cons of Paying a Car Loan With a Credit Card

Using a credit card for car payments can also have disadvantages. Here are the main ones to consider:

1. Decreased Credit Score

Your credit utilization ratio, which is the amount of available credit that you’re using, is a significant factor in your credit score. If this ratio exceeds 30% on a single card, your credit score may decline. So, charging your car payments to your credit card is only advisable if you can pay off the balance each month.

2. Excessive Debt & Penalties

If you use a 0% interest credit card and fail to pay off your debt before the promotional period ends, the interest rate can surge to around 25%. If you use a regular card without a low-interest grace period, the debt can accumulate quickly, leading to hefty interest costs. Some credit card companies may also charge extra fees for car payments.

3. Credit Limitations

Most credit cards have spending limits, and charging your monthly car payment to your card could push you close to or over this limit. This could leave you in a difficult situation if an emergency arises and you need to use your card. Moreover, routinely maxing out your credit card can lead to high-interest payments.

What to look out for when paying a car loan with a credit card

When considering paying off a car loan with a credit card, there are important factors to keep in mind:

1. Paying Off the Loan

You could use the cash from the credit card money transfer to pay off the loan gradually. However, this strategy may not be ideal as you’ll likely end up paying interest on both the loan and the credit card. If you’re struggling with payments, this could be an option, but it should be cautiously approached.

2. Terms & Conditions

The first step is to find a credit card with a favourable rate on money transfers, allowing you to borrow and transfer the money into your bank account. However, the terms and conditions of your car loan may dictate how you can do this. Some lenders may charge a fee for early repayment to compensate for the interest they would have earned over the life of the loan.

3. Proceed with Caution

A favourable rate on a money transfer is typically only offered to those with good credit. Look for a card offering a 0% rate on money transfers and use it exclusively for the car loan. Remember that failing to make the minimum monthly payment will incur fees and interest charges.

4. End of 0% Rate

If your 0% rate period ends, you might want to apply for another credit card offering a 0% rate if possible. This can help keep your interest costs low.

5. Alternative Option

If you haven’t yet purchased the car, consider other financing options. These could include traditional auto loans, personal loans, or even leasing.

Common Car Loan Terms You Should Know

Understanding common car loan terms can be essential to making informed decisions when financing a vehicle. Here are some of the key terms you should know:

1. Down Payment

This is the amount of money you initially pay towards the total price of the vehicle. It could be in cash or through the trade-in value of your current vehicle or manufacturer incentives like cash rebates. A larger down payment reduces the sum you need to borrow. Typically, a down payment should be at least 20% of the purchase price for a new car and 10% for a used car.

2. Interest Rate

This is the annual borrowing fee, usually represented as a percentage of the loan. The interest is often included in your monthly payments, which also go towards paying off the principal loan balance.

3. Annual Percentage Rate (APR)

The APR represents the total cost of borrowing, including all fees and interest, such as loan origination fees. Comparing APRs instead of interest rates brings a clearer picture of the total cost of loans from different lenders.

4. Manufacturer’s Suggested Retail Price (MSRP)

This is the price the car’s manufacturer recommends for dealers to charge for the vehicle. It’s also known as the list price or sticker price. Buyers often negotiate a price lower than the MSRP.

5. Prepayment Penalties

Some lenders charge a fee if you pay off your loan before the end of its term. This fee helps the lender recoup some of the interest they would have received had the loan been repaid as originally agreed.

6. Principal

This is the amount of money you’re borrowing to pay for the car, taxes, and fees, excluding interest charges. For example, if a vehicle costs $35,000 and you make a down payment of $7,000, you’d finance the remaining $28,000 – this is your loan’s principal.

7. Term

The term of a loan is the time frame in which you are expected to pay it off. With auto financing, the term is usually expressed in months. As car prices increase, loan terms are becoming longer – some extending up to 96 months (eight years).

8. Total Cost

This is the full amount you will pay to purchase a vehicle, including your down payment, trade-in value, principal, interest, and fees.

9.Truth-in-Lending Disclosure:

This document, mandated by the federal Truth-in-Lending Act (TILA), provides key information about a loan. It discloses important details like the loan’s APR, finance charge, amount financed, total number of payments, and any prepayment or late payment fees.

Tips for Responsible Credit Card Use in Car Loan Payments

When it comes to using credit cards responsibly, especially when paying for car loans, here are some key tips to keep in mind:

1. Stay Under 30% of Your Total Credit Limit

Maintaining a credit utilization ratio under 30% can help keep your credit score healthy. This ratio is the percentage of your total available credit that you’re using. For instance, if your limit is $1,000, aim to keep your balance under $300.

2. Use the Card for Needs, Not Wants

Credit cards should be used carefully to avoid unnecessary debt. They can be helpful in emergencies, for example, to cover a bill that’s due before your next payday. Consider the credit card as a temporary loan to yourself and aim to pay back the amount as soon as possible to minimize or avoid interest charges.

3. Consider a Rewards Card

If you’re using a credit card for most or all of your purchases, getting a card that offers rewards may be worthwhile. This way, you can earn benefits like cash back, airline miles, or retail points, in addition to avoiding interest charges.

4. Never Miss a Payment

Always ensure you pay your bill every month, even if it’s just the minimum payment. Missing a payment can lead to late fees, penalty interest rates, and a negative impact on your credit score.

5. Pay Off Your Balance Each Month

By settling your credit card balance in full each billing period, you can evade the imposition of interest on your purchases. This approach allows you to reap the advantages of credit card usage without the added weight of interest fees and charges.

6. Use the Card as a Budgeting Tool

If you’re assured of your capacity to handle a credit card sensibly and settle the balance each month, you might contemplate using it as an instrument for budgeting. By channelling all your expenses through your credit card, monitoring your expenditures becomes straightforward. Yet, this strategy should only be adopted if you’re certain of your ability to clear the balance monthly.

Direct vs. dealership financing: Which one is better?

Is Direct Financing Any Better?

Financing a car through a bank involves directly approaching a bank or credit union for a car loan, which allows you to bypass the dealer and potentially get preapproval for a loan before visiting a dealership. However, like any financial decision, it has its pros and cons.

Pros of Financing a Car Through a Bank

1. Better Terms: By going directly to a bank or credit union, you might get better terms for your auto loan. Dealers usually have a specific set of lenders they work with, and you could secure better terms elsewhere. Also, the rate offered by a bank or credit union won’t include any dealer markup.
2. Avoid Additional Costs: Having an approved loan amount on paper could prevent the car salesperson from persuading you to include add-ons you don’t need.
3. Saves Time at the Dealership: If your financing is taken care of upfront, you can save time at the dealership.

Cons of Financing a Car Through a Bank

1. Not Guaranteed a Lower Rate: Although exploring various options may enhance the likelihood of obtaining a loan with a low interest rate, it’s not a certainty. There might be occasions when the car dealer has special offers on new cars, and if your credit score is outstanding, you might even be able to lock in an interest rate of 0%.
2. Possible Delays: If you need clarification on the model you want, some lenders may not offer preapproval, which can delay the car buying process. Some lenders may require you to buy from a dealer in their network, which could take longer if the car you want is at a different dealership.
3. Navigating the Process Alone: Shopping for a car loan can be time-consuming, and if you’re buying a used car, you’ll have to look up vehicle and eligibility requirements on your own. If saving time and simplifying the process are your priorities, there might be a better fit than this option.

Going The Dealership Way

Financing a car through a dealership is another common option for potential car buyers. The process involves the dealership acting as a middleman between you and potential lenders. After selecting the vehicle, the dealer will have you fill out a credit application, which they’ll submit to multiple lenders, allowing you to compare rates and terms.

Another form of dealer financing is “buy here, pay here” (BHPH) dealerships that offer in-house financing. These dealerships specialize in working with people with bad or no credit. However, it’s important to note that these loans often come with high costs and down payment requirements, and there’s a higher likelihood of repossession.

Pros of Financing a Car Through a Dealership

1. Convenience: If you don’t have time to shop around on your own, having the dealer handle the process can be incredibly convenient.
2. Flexibility: You won’t be limited to dealerships within a lender’s network; you can focus your search on the vehicle, regardless of which dealer is selling it.
3. Options for Bad Credit: If your credit is poor, certain dealers specialize in working with you and your needs.

Cons of Financing a Car Through a Dealership

1. Potential Higher Costs: In some cases, a dealer may negotiate a higher interest rate with you than what the lender offers and take the difference as compensation for handling the financing.
2. Less Control: You won’t be able to pick which lenders the dealer sends your application to, which gives you less control over your loan offers.
3. Not Available for Private-Party Transactions: If you’re buying a car from a private party instead of a dealer, this option won’t be available to you.

Frequently Asked Questions (FAQs)

A. Can I Pay My Entire Car Loan With A Credit Card?

While it’s technically possible to pay a car loan with a credit card in some circumstances, most lenders don’t permit this form of payment, especially on a recurring basis. This is mainly because accepting credit card payments often involves processing fees that lenders would rather avoid.

B. Are There Specific Credit Cards That Are More Widely Accepted For Loan Payments?

Visa and Mastercard are the most widely accepted credit cards globally. According to data, Visa credit cards can be used at 44 million merchant locations in more than 200 countries and territories. In comparison, Mastercard credit cards are accepted at 37 million merchant locations in over 210 countries and territories.

C. How Does Paying A Car Loan With A Credit Card Impact My Credit Score?

If you settle your car loan ahead of time and it’s your sole instalment account, your overall credit score is likely to improve over time.

D. What are some of the possible alternatives to establish a credit history?

Building a credit history is important and can be done through several methods other than using a traditional credit card.

These include being an authorized user on someone else’s card, using a secured credit card, taking out a credit-builder loan, having rent payments reported to credit bureaus, including utility and phone payments in your credit report, taking out personal loans, and making consistent payments on student loans.

The key to building a strong credit history is to make regular, on-time payments and to keep your credit utilization low.

Conclusion

While the prospect of using your credit card to settle your car loan may not be universally applicable, this blog post has expanded your understanding. As you navigate your financial landscape, we can all agree that knowledge is the key to making informed decisions that steer you toward prosperity.

If you find yourself looking for a trustworthy automotive experience, look no further than Madman Motors. With a passion for obtaining exceptional used cars and a commitment to customer satisfaction, Madman Motors is more than just a dealership. We are the destination for enthusiasts seeking a blend of quality, style, and unparalleled service.

Visit Madman Motors today, and discover your dream car. If you need help with car loans, speak to one of our Mad Finance representatives to help you get the best in finance.