Can You Make a Down Payment on a Car With a Credit Card?
Putting a car down payment on a credit card can allow you to earn credit card rewards and can sometimes help you save on interest. But car dealers may limit the amount of a car's purchase price you can charge, and you may end up paying more interest in the long run if you can't pay off the balance before credit card promotional rates expire.
Every time I’ve purchased a car, I’ve used a credit card to cover at least part of the cost. When I was in law school and couldn’t afford to pay cash for a car, I used a balance transfer credit card to obtain money at 0% interest that I used to pay for the car. More recently, I’ve charged as much of the purchase price as I was allowed to on rewards cards—netting me a lot of credit card points—and paid off the balance when the bill came.
Both of these approaches made sense for my situation at the time and using a credit card to help you buy a car might make sense for you, too. In particular, you might want to use a credit card to make a car down payment if you’re leasing a car or taking out a loan to buy a vehicle.
However, it’s important to make sure you don’t take on more debt than you can handle, particularly if it’s high-interest credit card debt. So carefully calculate all costs and payments before you decide.
Car down payments may be required when buying or leasing to protect auto lenders or leasing companies. Lenders want to decrease the chance of default by making sure you have “skin in the game.” A down payment also reduces the chances you’ll end up owing more than the car is worth.
Using a credit card to make the down payment could make it possible for you to earn rewards points or even afford a down payment you might not otherwise be able to make. To find out if putting a car down payment on a credit card makes sense for your situation, read on.
Reasons to Pay Your Car Down Payment With a Credit Card
There are lots of reasons it might make sense for you to use a credit card for a down payment when you purchase a vehicle, including the following.
You Can Earn Credit Card Rewards
Down payment requirements vary depending on whether you’re leasing, buying new, or buying used. Some lenders want you to put as much as 20 percent down on the total price of a new vehicle because the car depreciates so much in value. This could mean your car down payment is several thousand dollars.
If you have a cash-back credit card or rewards credit card, it can be a big benefit to put a down payment on your card. If you put down a $5,000 down payment and your card gave you 2 percent cash back, you’d get back $100. You basically end up getting a whole lot of credit card points for spending you’re required to do.
Your Credit Card Company is Offering a Low APR
Many credit card companies make special introductory offers, such as 0% annual percentage rate (APR) for purchases made in the first 18 months.
If you can get a card offering 0% and you charge your down payment, you won’t pay any interest charges. This can provide significant savings, especially since auto lenders may give you less favorable rates on the entire amount you borrow if you don’t make a down payment or if your down payment is very small.
Balance transfer offers that charge 0% can also be a great deal. That’s how I bought my car while I was in school. Because I was able to get a 0% rate for 12 months, I paid no interest as I paid off what I’d borrowed over the year.
Many credit card companies provide balance transfer checks so you can use the money for this purpose. Just be sure to check if there’s a fee—some cards charge around 3 percent to 4 percent of the transferred balance—and make sure you don’t accidentally take a cash advance, which can be very expensive.
You Have the Cash to Pay Off the Credit Card Debt
Putting your car down payment on a credit card makes sense if you have the money to pay off what you owe when the statement comes in or before any promotional rates expire.
If you can’t pay off the card and would need to pay high credit card interest, you may be better off either waiting to buy the car until you have the money for a down payment or looking for an auto loan that allows a smaller down payment. Otherwise, you could pay a fortune in interest, as standard credit card rates are typically pretty high.
What to Be Aware of When Using a Credit Card to Buy a Car
Opting for a credit card down payment might make sense in some cases, be sure to consider a few key issues before you decide this is the right financial move for you.
What is the Interest Rate on the Credit Card?
Find out exactly what the interest rate on the credit card is before you borrow, as this affects your overall vehicle costs as well as your monthly payment.
The industry average new car price in 2018 was $36,270, according to Kelley Blue Book. If you were required to put down 20 percent, you’d need to put $7,254 on a credit card if you want to charge your car’s down payment. To pay that card off before a 12-month 0% promotional APR expired, you’d need to pay $604 per month. That’s on top of the cost of the car loan, which would be around $550 monthly if you borrowed the remaining $29,016 for 60 months at a rate of 5.15%.
Taking out an auto loan with a low or no down payment requirement might provide more affordable monthly payments, although you might have to pay more in interest over the long term if the auto loan charges a higher rate due to the lack of a down payment.
What is the APR Once the Introductory Rate Ends?
If you can’t get a 0% promotional rate on a credit card or if the promotional rate expires before you can pay off what you owe, your credit card interest rate may be much higher than the rate of an auto loan.
The average credit card interest rate is around 17.07% as of October 2018, while the average car loan rate is 4.77% for a 48-month loan for a new car and 4.84% for a 60-month loan for a new car. While a lender that offers a low down payment or no down payment loan may charge a premium so your loan costs a little more, rates likely will still be well below 17.07%.
How Much Will a Credit Card Cost Over the Long Term?
It’s important to consider the total estimated costs of putting a car down payment on a credit card before you decide if this approach is the right one. Consider:
- Whether you qualify for a promotional APR
- Whether you’ll be able to pay off the borrowed amount before the promotional rate ends
- How much interest you’ll have to pay if you still owe when your promotional rate expires
- Other possible sources of vehicle funding, such as auto loans with smaller down payment requirements
By looking at the big picture, you can make the most informed choice about whether to put a car loan on a credit card.
What to Know if You Do Use a Credit Card
If you plan to put a car down payment on a credit card, be aware that car dealerships typically cap the amount of a car’s purchase price you can charge. When we purchased our last car, we wanted to charge the whole vehicle to max out our credit card points but were limited to only charging $4,000.
You’ll also need to shop around for the best credit card offering a low promotional rate for as long as possible and have a detailed plan for how much money you’ll pay each month to get your loan repaid ASAP.
Making the Right Choice
Putting a car down payment on a credit card might be an option to consider if you don’t have the money to buy a car and your lender requires a down payment. It might also be worth considering if it offers a better deal than an auto loan, or if you want to earn credit card rewards and have the cash to pay off the credit card balance in full.
Just be sure to look at the big picture of how much charging your down payment will cost so you can be confident you’re making a financially responsible choice.
Author: Christy Rakoczy
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