This is a guest post by Mr Credit Card from www.askmrcreditcard.com. Mr Credit Card has a credit card review site with lots of credit card offers. Mr Credit Card favorite credit card issuer is American Express.
Does it make sense to use a credit card to pay for a car? This is quite a common question that we get from some of our readers. I think there are several ways to look at this. But first, will dealers really accept credit card payments?
The answer is yes but with a few caveats. If you are looking to buy a car and you ask to use your credit card, most dealers will say yes, but cap you to a certain amount. $5,000 seems to be a common denominator.
Technically speaking, car dealers are not allowed to do that. According to agreements signed by both Visa and Mastercard, merchants will have to accept any amount if they accept credit cards. Some folks have claimed to be able to get dealers to accept credit cards for the full amount because they threaten to call Visa.
But let’s take a look at the economics for car dealers. Most credit cards will charge between 1.5% to 2% fees whenever a customer uses a credit card. On a say $30,000 car, that could amount to $600. That is enough to wipe out a significant amount of profits for the dealer and salesperson.
Most car deals have a variety of factors that go into the final price.
- Extra features
If you tell a dealer at the last minute that you want to pay the full amount and you negotiated hard for it, they will most likely not go ahead. If they do, you are probably paying a little more than you should.
The only time where a dealer may be willing to take the full charge is if you are buying a cheap second hand car.
What card to use ?
Obviously, if you decide to use your car to pay either in full or partial payments, then it is best that you get the most of using your credit card. The most obvious way to benefit is to use your airline credit card and earn lots of air miles with one purchase. These are the best type of cards to use if you pay in full. And I would also advice that you use your credit card only if you can pay in full.
If you do not pay in full, using your credit card as a means of financing gets a little trickier. Should you use your credit card? Well at the end of the day, it really depends on what rate you can get. Most auto financing trade these days range from 9% to 16%. It might make sense to finance your car purchase with a credit card in some circumstances. For example you may find balance transfer credit cards that offers you 0% APR for six months and the rate will go up to 10.99% thereafter. Or you may find low interest credit card at 9.99%. In either case, it may make sense to use a credit card to finance you car.
The main advantage of financing your car this way is that a credit card is actually an unsecured credit line. If you miss a payment, the credit card company cannot actually repossess your car whereas your car financing company can. However, even though you can get a lower rate, your monthly minimum payments may be higher depending on how fast you want to pay off your credit card. Having said that you have the flexibility to vary your payments when you charge it to the card.
There is another extreme school of thought that even if you can afford to pay in full for your car, you should still write a check from a credit card that offers a 0% ARR balance transfer deals. You can get 6 to 12 months of 0% financing. What you are essentially doing is to give yourself six months or twelve months (or whatever the 0% deal is) to earn extra interest from the bank rather than paying in cash the moment you sign on the dotted line. When banks were paying 5%, I guess that made sense. But with banks paying only 2+% for CDs, it does not really look as compelling as before.
To sum up, if you can pay cash for your car but want to use your credit card to earn rewards, car dealers cannot stop you from doing that under agreements they sign with credit card issuers. But, you can either tell them up front that you are using a credit card, which will almost result in you having to pay a higher price. Or you can leave it till the end and just take out your card. If you do not tell them upfront, most will restrict you to charging about $5,000 to your card. If you threaten to check with your credit card, they might either relent or renegotiate the price. Whatever you do, it’s your choice.
If you are financing a car, then you really have to compare rates and use that form of financing that gives you the lowest rate or payment.
Other Relates Resources