How to buy a car with a credit card in Australia
Watch out for interest, surcharges, fees and credit limitations.
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It's possible to buy a car with a credit card in Australia. However, there are a number of factors you need to consider, including the cost of the car, your credit limit, whether the seller accepts credit card payments, and surcharges and interest rates.
What are the pros and cons of buying a car with a credit card?
Pros
- Pre-approved credit. If you use your credit card (if you have a high enough credit limit), you don't have to go through the hassle of looking for or applying for another loan.
- Instant buy. You don't have to wait until your loan is processed and settled. If you want that car now, using your pre-approved credit could help you get the car straight away.
- Rewards. If you have a rewards or frequent flyer credit card, buying a car could help accumulate points. There are several caveats to this, as it depends on how the payment is made. BPAY payments, for instance, won't earn points. Rego could also be considered a government charge and may not earn points.
- Split costs. You could have cash ready for your new car, but you're a little short. You could use your credit card to cover the difference without applying for other finance.
- Interest-free periods. You could use a credit card with an introductory 0% purchase rate and not pay interest for a set amount of time. If you manage your repayments well, you could avoid paying interest entirely.
Cons
- Higher interest and fees. Once the promotion period is over, you'll be paying standard credit card interest rates. These rates are almost always higher than personal loans or car loans.
- Shorter loan terms. If you're sticking to the promotion period, you may have a window of 3 to 15 months to pay off the loan.
- Revolving credit with no set end date. With credit cards, you can pay just the minimum amount due. This could lead to debt you could carry for a while, with no definite end date in sight. It requires discipline on your part to pay off this debt.
- Surcharges and annual fees. Credit cards come with annual fees. You may also have to pay a surcharge. These add to the cost of the loan.
- No interest-free days with outstanding balance. With the car debt as your outstanding balance, you won't be able to take advantage of interest-free days for other purchases.
- Could use up your entire credit limit. A car is a big ticket item and it's likely you'll use up your entire credit limit. This means that you won't be able to use your card for other purchases, or it won't be enough. This could potentially create cash flow problems for you.
Will the merchant/seller accept a credit card?
This will depend entirely on the seller. A private seller is unlikely to have the facilities to process a credit card payment. But if you're buying from a dealer, it's possible they'll accept credit card payments.
Apart from making sure the seller accepts credit cards, you should also ask about fees and then weigh up the cost. Apart from the cost of the card and any interest you have to pay, there is likely to be a surcharge. These surcharges can range from 1% to 1.5% for Visa and Mastercard, and 1.5% to 2% for American Express. That's an additional 1% to 2% you'll be paying on top of all the other costs.
For instance, if the surcharge is 2% for a $10,000 car, it will cost you another $200.
What should I consider before buying a car with my credit card?
- Cost. There's the cost of the car, and then there's interest payments, fees and surcharges to account for. It may not be financially viable to use your credit card, so make sure you thoroughly crunch the numbers.
- Credit limit. You will only be able to use up to your credit limit. You could consider asking for a credit limit raise if your credit score is healthy.
- Repayments. Work out a repayment plan before you commit to the purchase. If you're working with a 0% or low purchase rate, calculate how you will pay it off during the promotional period of 3 to 15 months, as a standard higher rate will usually apply after this period.
- Depreciation. Cars can depreciate and lose value quickly. It may not make sense to pay high interest on a steadily depreciating asset as you may end up paying far more than it is worth.
- Surcharge. You may have to pay a surcharge, around 1% to 2% of the transaction value (or more, depending on your card type).
- Credit score. If you miss repayments, or don't make regular repayments, your credit score could take a hit. However, paying off your debt on time can help improve your score.
- Cash flow. If you plan to use most or all of your available credit, any other direct debits or regular repayments will be affected. Also note that you may not enjoy interest-free days on new purchases while carrying an outstanding balance on your credit card.
- Let your provider know. Sometimes large credit card transactions could be flagged by fraud monitoring services. If you're concerned about this, contact your provider ahead of time and let them know the purchase is planned.
What are my other financing options?
- Savings. It may take a while to save for the car, but this can be the cheapest option. There's no interest, no fees, and you could earn interest on your money by parking it in a high interest savings account, or a return via Earn.
- Car loan. With a car loan, you get the benefit of low interest rates and longer loan terms. Securing the loan with your car will get you a lower rate than an unsecured loan. Some car loans come with interest rates below 5%.
- Personal loan. Personal loans offer lower interest rates than credit cards. The loan can be either secured or unsecured and comes with longer loan terms. Another advantage is that you have a set loan term. Debt with a definite end date can be easier to handle than rolling debt.
With both car and personal loans, the repayments will likely have a lower impact on your finances. However, with a longer term, you'll be paying interest for the duration of the loan. Be sure to account for interest costs and any monthly or establishment fees in your calculations.
How does buying a car with a credit card compare to a car loan?
As an example, let's say we're looking at a used car that costs $6,000 and you want to pay it off over 2 years.
| Product | Interest rate | Term | Monthly repayments | Surcharge/loan fees | Total cost |
|---|---|---|---|---|---|
| Car loan | 9% p.a. | 2 years | $284.53 | $250 | $6,829 |
| Low rate credit card | 19.94% p.a. | N/A but planned for repayments over 2 years | $311.30 | $120 (2%) | $7,351.27 |
These details have been calculated with Finder's credit card repayment calculator and personal loan calculator.
Based on a 2-year repayment period, paying for the car with a credit card costs $5,477.73 more than getting a car loan.
A lot of the cost depends on the interest rate that you get and, in this example, we have used the average standard credit card interest rate according to the Reserve Bank of Australia. As rates vary a lot, you can read more about car loans and personal loans to find the loan that works best for you.
Bottom line
Buying a car with your credit card may not always work in your favour. The cost of interest builds up over time and can add to the cost of your car. You may be better off using your credit card only to pay for insurance and rego instead. It may make more financial sense to either save up for the car or find more affordable credit options.
Compare credit cards with high credit limits for buying cars
Images: Shutterstock
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