If you are looking for car finance deals, perhaps using a credit card isn’t the first option that comes to mind. when done properly, if you ate buying a new vehicle, using a credit card can be the easiest way to borrow.
When you buy a car, you have several different options. They include a personal loan, car loan or lease agreement – but are not limited to it.
You may also be able to use a credit card, especially o yours has a low-interest promotion, which can be a good option. Purchasing a car with a credit card, however, carries risks and you’ll want to be careful to minimize interest.
Why Use a Credit Card to Buy a Car?
In an ideal scenario, you would get the longest 0% credit card that you can, be it a purchase card or a money transfer card. You’d then use it to buy the car, and pay off a set amount each month, clearing your balance before your 0% interest rate expires.
If you were to do this, your debt is cleared at the end of the 0% period, so you pay no interest, meaning the credit hasn’t cost you an extra penny.
Of course, for some, this isn’t a realistic option. Many dealers don’t accept credit cards, or if they do, they only allow you to pay a limited amount.
This is because they get charged a 0.3% fee by their banks when you use the card, and they aren’t allowed to charge you this fee.
Your credit card provider may also limit the amount you can spend – not many will give you a limit of more than £5,000, and most have limits much lower than this.
Most likely you’ll have to be looking at a used car, or a small new one, for paying on a credit card to be an option for you.
Paying with a credit card also gives your purchase stronger protection if you should have any problems with the garage or your vehicle.
Under Section 75 of the Consumer Credit Act, your card provider shares responsibility with the company you paid for goods or services and can supply you with a refund. This is applicable to purchases between £100 and £30,000.
How to Buy a Car Using a Credit Card
Using 0% rates
After securing a card with a 0% rate (for example, Tesco offers 19 months interest-free on their purchase cards) you should set up a monthly direct debit. This direct debit should meet at least the minimum payment.
However, for large debts like this, it’s best to work out how much you need to pay monthly in order to pay off the debt before the 0% period ends.
When working out how much to pay off monthly, divide the cost of the car by the number of months that your card has at 0%. If this turns out to be more than you can afford, then you need to look at cheaper cards or find a way to extend your 0% period.
Money transfer cards
If your dealer doesn’t take credit cards, you could still pay at 0% interest using ‘money transfer’ cards, it’s just a bit more complicated. These cards are best suited to loans of £5,000 or less, as you won’t be able to get a credit limit much higher.
The cards work by shifting cash to buy the car from your new card to your bank account for a one-off fee so that you owe the card provider rather than the car dealership.
It’s like taking out a loan, except it’s interest-free. Once the cash is in your account, you can use it to buy your new car.
The main drawback of money transfer cards is that you don’t get Section 75 protection on your purchase.
Money transfer cards are quite niche and aren’t widely available, so there aren’t many options on the market. And if you don’t make the minimum monthly repayments, you could end up with a massive interest rate of over 20%.
Credit Card Purchases Are Not For Everyone
As convenient as it is to pay for anything with a credit card, it is not always the best option. There are a few red flags to watch out for that may give you an indication that plastic is not the best way to go. Read the fine print of your intended card(s).
Make sure you understand the interest rates each charge. Unless you have the cash on hand or can acquire it before your first payment is due, you’ll have to pay these charges.
Another red flag is your timeline for paying off the vehicle. If you want to make it a short time, a credit card is an option. However, if you are looking to pay it off over a number of years, then you may want to consider another form of payment.
The final red flag to consider is your credit. If you do not have good credit, then buying a car is hard, no matter how you intend to pay for it. If you are recovering from bankruptcy, it is also a challenging time.
Both situations mean you may not have the chance to get a reasonable interest rate, and the dealer may not give you the option of using a credit card.
Alternative Ways to Finance a Car
There are other ways of financing your car purchase. Consider them in addition to credit cards, so you can walk off of the car lot feeling like you got the best deal.
When you get a car loan, the car you are planning to buy is used as security for the loan. If you can’t meet your loan obligations, the lender has the right to seize your car.
The interest rates are usually lower on this kind of loan since it has been secured to an asset.
When you take out a personal loan to purchase a car, you must make regular payments like you would with any other loan. You can spread these repayments out anywhere between one to seven years.
You can either get a secured or unsecured personal loan for car financing, and this will influence both the interest rate and how much you are allowed to borrow.
Getting a lease is a lot like renting. You can put a down payment on a car, after which you’ll make monthly payments for as long as the lease lasts.
You’ll have the option to buy the vehicle, for a residual, when the lease has expired. The residual is the wholesale value of a car at the end of the lease, and it’s set by whoever finances the lease.
1. Can you pay your car loan with a credit card?
Yes, it’s possible to pay your car loan with a credit card. You’ll need to make a balance transfer, so a card with a long 0% intro APR period on balance transfers would be the best choice.
2. Can you buy a car with a credit card?
This depends on your dealer. If you’re thinking about buying a car with a credit card, ask your dealer if it accepts plastic. Also, ask which card networks it accepts — for example, Visa, Mastercard, etc.
3. What if the dealer wants to add a surcharge for using a credit card?
Your best defense is agreeing on the price of the car with your dealer before discussing payment options. This way, you’ll know if your dealer wants to add a surcharge.
Even if a credit card turns out to be the most suitable option for you, cards don’t offer much protection in the event that you miss a payment or pay late.
In fact, credit cards will often heavily punish you for a missed or late payment. A credit card may save you money on your car purchase, but if not managed correctly, it can also get you into trouble.
Ultimately, you should only use a credit card for a car purchase if you can pay off your balance quickly — and if you’ll earn rewards.
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