Find out how a credit card can be used to buy a car, and what other options you have.
There are a range of payment options when buying a car, including a personal loan, car loan or lease agreement. There’s also the option to use a credit card, although there are a few ways this should be done to minimise interest. Whichever way you do it, ensure you know exactly what the cost of the loan will become over the course of the loan, and carry out an effective comparison taking into account all fees and charges.
While a credit card may not seem like the ideal option, today’s economy has changed the deal. With low interest rate promotions everywhere in the market, a credit card may be the ideal option for paying off your new car. Credit cards carry risks however, so it is important that you take the time to figure out if a credit card is really the most suitable option for financing that new car.
How to buy a car with a credit card
The main way to pay for a car purchase is to use a low interest rate or 0% offer. This would involve you applying for a credit card with a low or 0% interest rate for a set amount of time.
You then pay off the balance gradually without the hefty charges associated with a regular credit card or personal loan. If you can't pay the car off within the promotional period you'll be hit with a high interest rate, so you'll need to either transfer the loan over to a loan or balance transfer the remaining balance over to a card with a low or 0% interest rate.
You could theoretically continue to balance transfer the remaining balance to a new card each time the promotional period ends, but there are a few drawbacks to this method.
Firstly, you're relying on the fact that you'll be approved for these new credit cards when you need them. Credit card providers are notoriously secretive when it comes to the application stage, meaning it's hard to know if you'll be approved or not.
The next stumbling block is built into the balance transfer process itself. When you transfer a balance over to a new card you'll only be able to transfer a certain percentage of your total approved limit. This is usually around 90% of your approved credit limit.This means that even if you're approved for a card, if a card provider gives you a lower credit limit you'll be unable to move the whole balance.
Another important thing to remember is that every time you apply for a new credit card your potential card provider will check your credit file. Each of these checks or 'credit enquiries' are also recorded on your credit file. Too many credit enquiries in any one time will be a red flag to lenders.
What this basically means is that it may become harder for you to be approved by credit providers the more you apply for cards, and if you plan to regularly move your balance around to pay your car off this may become a problem.
Other things to consider when buying a car with a credit card
- Annual fee
Many credit cards come with annual fee, so you'll have to factor this into your equations when working out how much this method of buying a car will cost you.
- Credit card surcharges
Some car dealers will charge a surcharge for purchases made using a credit card. You should also factor this into the total cost of the card. A surcharge of even 3% on a purchase of $10,000 is a whopping $300. When taking the annual fee and possible surcharge into the equation, remember a loan can come with an application fee, so compare the two costs before coming to a decision.
- Revert rate
A credit card offer such as a low purchase rate or balance transfer will end after a certain number of months. When this happens the rate will revert to the standard variable purchase rate or the cash advance rate. You should find this out to avoid any nasty surprises.
- Rewards points
If you're making a big purchase with a credit card, you might be able to earn rewards points on it. When making large credit card transactions in order to earn rewards points be sure to compare the value of the rewards points with the interest you may pay. Interest charges could seriously reduce the value of any points.
- Could limit your cash flow
Because your credit limit will be strained with the car purchase, you may have less to go towards paying off your bills and other expenses which you usually use your credit card for.
How else can you finance a car purchase?
There are many other ways of financing your car purchase.
When you get a car loan, the car that you are planning to buy is actually used as security for the loan. It is basically the same thing as a secured personal loan. If you can't meet all of your loan obligations for payments, 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.
There is a certain criteria that must be met for the car to be considered eligible as security. Some of these are
- Used cars need to be younger than seven years old for many lenders, and the loan amount minimum may also be a consideration.
- New cars must be purchased only from a dealer and be brand-new. Loans for new cars usually have interest rates that are lower.
- Secured loan minimums, which means the amount borrowed and not the purchase price of the car, can be between $4000 and $10,000 for any car loans.
You may still qualify for a car loan if you do not meet all the criteria, you just need to check first before applying for one.
When you take out a personal loan to purchase a car you will borrow money that you will need to repay with regular payments. You can spread these repayments out and will be given between one and seven years to pay it back. Your repayments will be smaller if you make the term longer. If you use a personal loan for car finance you will not be able to use this credit to make other purchases and you usually cannot redraw the money that you've already repaid even if you have repaid the minimum required and then some.
You can either get a secured or unsecured personal loan to use as car finance, and this will influence both the interest-rate and how much you are allowed to borrow.
Getting a lease for your car finance is a lot like renting, but you will be given an option to buy it when the lease has expired for a residual. A residual is a percentage or value that has already been agreed upon when the car was first purchased.
This finance option is good for businesses where the chattel, (the car), is used more than 50% of the time for business. This allows the business to claim the car for benefits that are tax eligible.
Sometimes this is also called commercial hire purchase, where the car is purchased by the financier, and you hire a car from them for a specified amount. This option for car finance is usually applicable for business purposes.
There are a lot of different car finance options to choose from, and you should research them carefully before making your final choice. A credit card can work, but you should be extremely careful before embarking down this path.
Do your homework
It may be possible to save money by using a credit to purchase your new car, but then again it may not be. You will have to sit down and go through all of the variables to determine what the ideal payment option will be. Even if the credit card option turns out to be the most suitable one, credit cards do not 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 credit cards can also get you into trouble.
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