Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you’re thinking about buying a car but don’t have cash in the bank for much of a down payment, much less paying the bulk of the cost upfront, you might be contemplating a solution that people are talking about these days: buying the car with a credit card.Yes, it is sometimes possible to use a credit card to buy a car. But other times it is impossible, because the car dealer won’t do it. And even if you find a dealer who will, there are serious financial pitfalls to know about.
Do Car Dealers Accept Credit Card Payments?
Some car dealers accept credit card payments for the entire purchase of a car, while others accept credit card payments for only a down payment. And still others won’t take a credit card at all.Keep in mind that every time a car dealer processes a credit card transaction, the dealer has to pay a fee. The larger your credit card charge, the more the dealer pays in fees. Many of the car dealers who refuse to accept credit cards have been burned by a “chargeback.” This is when a customer disputes a transaction and asks the credit card issuer to reverse the charge. While it was created to protect consumers, it can be abused by those trying to get items for free.
Can You Repay the Car Costs in Time?
If you do purchase a car with a credit card, you’ll want to pay down or pay off the balance as quickly as possible, because you likely have a high monthly interest rate on the card. In fact, most credit cards have higher interest rates than what you’d pay on an auto loan. According to Experian, a 60-month new car loan is currently averaging 5% while the average variable credit card interest rate is 17%. This begs the question of why not just finance with a loan?Some people try to use a new credit card with a promotional window of no interest payments to buy a car and then race to pay off the card before the window closes.But people don’t always make that deadline. And whether you have a secured credit card or an unsecured card, that card is racking up interest every day that you don’t pay on the balance.
Things to Consider When Buying a Car With Your Credit Card
If you still want to buy a car with a credit card, there are a few things you need to be aware of. Make sure you’re well aware of how using a credit card works. Familiarize yourself with credit card terminologies and the terms of your card. How much is your annual percentage rate? When is your payment due? What are late fees?
Credit Card Limits
Depending on how much credit you have available on your credit card, there might not be enough to cover the costs of a car. If you’re unsure about your credit card limit, review your credit card statement. Keep in mind, if you’ve made any purchases that you haven’t paid off, you will have less credit available.
Credit Card Interest Charges
Be especially aware of those high credit card interest charges. If you’re charging a $20,000 car, the interest can quickly turn into hundreds or even thousands of dollars if you don’t pay down your balance. This is significantly higher than the interest fees you would pay with an auto or personal loan.
Inform Your Card Issuer Before Buying the Car
Some credit card companies will flag a card if there are unusually large charges, and buying a car certainly can be a large transaction. The last thing you want is for your credit card to be declined when you’re ready to get your new wheels.To prevent this from happening, contact your credit card company before you buy the car to let them know you’ll be making a large purchase.
If You Have a Reward Credit Card
The reason you might be considering charging a car to your credit card is to rack up rewards points. This is a fast way to get cash back or points you can use for travel and other rewards. But if you don’t pay the balance off quickly, you may owe more in interest than the equivalent in rewards.If you want to earn rewards, have a plan for paying off the balance quickly. Looking for credit cards with perks? Check out these top rewards credit cards.
Manufacturer Credit Cards
If you’re loyal to a particular car brand, you might see if the car manufacturer has its own credit card. Similar to rewards cards, these will give you points for purchases (and even more points if you make purchases from that car brand). If you’re a heavy spender, maybe because you use a credit card for your business, you could possibly rack up enough rewards points to cover part of the cost of a car.
Disadvantages of Buying a Car With Your Credit Card
Now that you know a bit more about how cards operate and some of the things to consider before using one to buy a car, let’s look at some of the reasons you might want to reconsider.
Convenience Fees
A convenience fee is a small charge the car dealer can add to a transaction when a customer chooses to pay with a credit card rather than a “preferred” method such as cash or a financing loan. This can add 3-5% to the car’s sale price. For a $20,000 car, that would be an additional $1,000.
Costly Transaction Fees
A transaction fee is a charge that a business has to pay every time it processes a customer's payment. And the auto dealer can pass this cost along to the consumer as well as the burden of the convenience fee.
High Interest Rate
If you understand how credit card payments work and can make a plan to pay off the entire amount within the billing period, you might not be hit with interest. But if you make a payment even a day after the billing cycle closes, you are out of luck.
Alternatives to Credit Card Car Purchases
There are plenty of other ways to go when paying for a car.
Cash Payment
This isn’t an option for everyone, but if you are able to save money and pay cash for the vehicle, you won’t pay any interest. Especially if you’re buying an older, more affordable car, patiently squirreling away money may be a wise financial move.
Getting an Auto Loan
If you can’t pay cash, the next best thing may be to take out an auto loan. These usually have lower interest rates (much lower than credit cards) and repayment periods of 3 to 5 years, which means you won’t have to scramble to pay off a $20,000 loan within a few weeks.Taking out a loan and paying on it on time each month may also help you build your credit, which can help you qualify for low interest rates down the road.
Trade in Your Old Car
If you currently own a car, trading it in can significantly reduce what you pay for a new or used car. You can trade it in to the dealer you’re buying a car from, or sell it to a private party (sometimes you can get more money this way) and then use that cash as a down payment for your next car.
Cosign With Someone
If you don’t qualify for an auto loan on your own, consider whether there is someone you can cosign for a loan with, such as a parent, a partner, or a friend. While you will be responsible for paying the car loan, should you not be able to, the lender can turn to your co-signer as a responsible party.
The Takeaway
If you want to buy a car with a credit card, you may have trouble finding an auto dealer who will take one. Should you succeed, you are still facing some steep downsides: transaction and convenience fees added to the purchase price, followed by the high interest that most credit cards carry. And if you max out your card on such a big ticket item, your credit utilization will pose problems for your credit rating.Using a credit card responsibly and strategically can help you build your credit history. Lantern can help you find the one that’s right for you. Check out the credit card rates you qualify for.
Frequently Asked Questions
What is the minimum credit card limit needed to purchase a car?
What are the processing fees of credit card payment for a new car?
How many cars can I buy with my credit card?
Is it a good idea to buy a car with a credit card?
Are there car dealers who accept credit cards?
Photo credit: iStock/VioletaStoimenova
SOLC0222053
About the Author
Susan Guillory
Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
