As a consumer, you may be accustomed to using credit cards for various purchases and expenses. But can you use a credit card to pay off a car loan? The answer is not a simple yes or no. While it may be possible in certain circumstances, it is not a common practice. In this article, we will explore the limitations and considerations of using a credit card to pay a car loan and provide alternatives that may be more suitable for your financial situation.
The Complicated Answer
While some credit card issuers may permit the use of credit cards for car loan payments, most auto lenders do not welcome this practice, especially for monthly payments. Credit cards charge merchants processing fees, which can be as high as 3.5% on payments. This is why car lenders are generally not in favor of credit card payments.
If you are considering using a credit card to make a car loan payment, it is important to check with your card issuer to see if it is allowed. Additionally, reach out to the car loan company to confirm if they accept credit card payments and to understand the necessary procedures.
However, there are other situations where you may be able to use a credit card in connection with a car loan.
Using a Credit Card to Pay off a Car Loan: Pros & Cons
Benefits
- Using a credit card for occasional monthly payments can help you avoid defaulting on the car loan when you are tight on funds.
- If you have a credit card with a 0% APR balance transfer offer, you can use it to pay off the remaining balance on your car loan. This strategy can be advantageous if you can pay off the balance transfer within the interest-free period.
- By using a credit card to pay off the car loan balance, you can remove the lien against the vehicle and prevent possible repossession.
Risks
- Using a credit card to pay off a car loan simply replaces one debt with another and does not lower your overall indebtedness.
- The interest rate on the credit card may be higher than the interest rate on the car loan.
- Swapping a fixed-rate car loan for a variable-interest credit card may not be in your best interest.
- Most auto lenders do not accept monthly payments on credit cards.
- Whether you opt for a balance transfer or a cash advance, there are likely upfront fees associated with these transactions.
- The credit limit on your card will limit your ability to use a credit card for most car purchases.
- Paying a large loan, like a car loan, with a credit card can increase your credit utilization ratio and potentially lower your credit score.
- You will be replacing a term loan with a specific time limit with a revolving line of credit that can remain outstanding for an extended period.
Which Credit Cards Can Be Used to Make Car Payments?
Below are a few examples of credit cards that can be used for purchasing a car, paying off an existing loan balance, or making monthly car payments.
My GM Rewards® MasterCard®
- Regular APR: 19.99% – 29.99% variable.
- 0% introductory purchase APR: 12 months for purchases; balance transfers not indicated.
- Balance transfer fee: Not indicated.
- Cash advance fee: None.
- Cash advance APR: 29.99%.
- Cash back rewards: 7x points for every $1 spent on GM purchases, and unlimited 4x for every $1 spent on all other purchases.
- Annual fee: $0.
The My GM Rewards® MasterCard® is designed specifically for purchasing GM vehicles. It offers rewards points that can be used towards the purchase of a new or certified pre-owned GM vehicle. However, this card does not provide a balance transfer option for paying off existing car loans.
Toyota Rewards Visa® Credit Card
- Regular APR: 20.99% – 29.99% variable.
- 0% introductory APR: Not offered.
- Balance transfer APR: 26.99% variable.
- Balance transfer fee: Greater of $10 or 5% of each balance transferred.
- Cash advance fee: Greater of $10 or 5% of each cash advance.
- Cash advance APR: 31.99% variable.
- Cash back rewards: 5x points for every $1 spent at Toyota; 2x on gas, dining, and entertainment; 1x for every $1 spent on all other purchases.
- Annual fee: $0.
The Toyota Rewards Visa® Credit Card allows you to earn rewards points that can be redeemed for service, parts, accessories, and eligible Toyota vehicle purchases. While it does offer a balance transfer option, the high APR and balance transfer fee may not make it suitable for paying off an existing car loan.
Citi Double Cash Card
- Regular APR: 18.99% – 28.99% variable.
- Balance transfer APR: 0% introductory APR for 18 months.
- Balance transfer fee: Greater of $5 or 3% of the balance transferred.
- Cash advance fee: Greater of $10 or 5% of each cash advance.
- Cash advance APR: 29.99% variable.
- Cash back rewards: 2% total, with 1% on purchases + 1% on payments.
- Annual fee: $0.
The Citi Double Cash Card offers a 0% introductory APR for balance transfers, making it a potential option for paying off a car loan balance. However, it is essential to pay off the transferred balance within the interest-free period to avoid high interest charges. The card also provides cash back rewards on all purchases.
Alternatives to Using a Credit Card to Buy a Car
If using a credit card to purchase a car or pay off a car loan does not seem feasible or suitable for your situation, here are some alternatives to consider:
Savings
If you have enough savings, using cash to pay for a car can eliminate the burden of monthly payments and allow you to own the vehicle debt-free.
Trade-in Your Current Vehicle
Consider trading in your current vehicle when purchasing a new one. The value of used cars has increased, and your trade-in value can serve as a substantial down payment, reducing the loan amount.
Take a Personal Loan
A personal loan can be a viable alternative to using a traditional car loan. Personal loans offer fixed interest rates, and you can use the funds to purchase a vehicle or pay off an existing car loan. However, personal loan rates are generally higher than car loan rates, and some lenders charge origination fees.
Refinance into Another Car Loan
If you have a high-interest car loan, refinancing into a new loan with a lower interest rate may be a better option. This can help reduce your monthly payment and potentially save money over the life of the loan.
The Bottom Line
While it is possible to pay a car loan with a credit card in certain situations, it is generally not recommended. Credit cards often have higher interest rates and fees compared to car loans. Using a credit card to pay off a car loan may only provide a short-term solution and can potentially lead to long-term financial complications.
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