Is Buying a Car With a Credit Card a Good Idea?
Buying a car with a credit card! Sounds crazy, right? Well, just let me explain this. Before we begin, there are a few very important things that I should mention. If you have the money to pay for a car with cash, that’s probably one of the best choices that you can make. Every time you use your credit card, you might end up taking on more debt. I would be letting you down if I didn’t share with you about another way you can save some money!
Potential Benefits of Using a Credit Card for a Car Purchase
I’m going to talk about 5 reasons why you should think about using your credit cards when buying a car.
1. When you use a credit card, the loan doesn’t require you to put up any collateral. That means if you ever run into money problems later on, your car won’t be taken away from you. You own it outright. The bank can’t come to your home in the middle of the night and take the car away.
2. You can always choose to pay a smaller amount each month. When people borrow money to buy a car, they usually want to pay back the loan in three to five years. The shorter the loan term, the higher the monthly payment will be. If you get a loan from a bank, your monthly payment amount stays the same for the entire length of the loan.
What if after a few months you start having trouble paying the full amount for the month? If you are late with payments or don’t pay everything at once, it might hurt your credit score. If you decide to use a credit card to buy the car, you will still have the option but not the obligation to pay the amount that will pay off the loan in three to five years. If you have any financial issues in a particular month, you can choose to make just the minimum payment, which is much smaller.
3. You don’t need to wait for a loan approval. You don’t need to wait for a loan approval. You can just use your credit line as if it were cash whenever you’re ready to make a car purchase. You don’t have to go into the back room with the car salesman to start discussing loan rates and loan applications.
4. Since you’re using a credit line, just like paying with cash, you have more power to negotiate when buying the car. From the car dealer’s point of view, you’re purchasing the car using your own money. That means you don’t have to handle the extra step of getting the loan. You can basically say, “I have the money in my hand; I want to drive today. Give me the deal I want, and I’ll fill out and sign the papers right away.”
5. And most important reason, You Can Save a Lot of Money!
Understanding the True Cost of Car Financing
When you borrow money to buy anything, like buying a car, a house, or even last night’s dinner, you are actually making two separate purchases. The first thing is the real item you want to get, such as the car. The second part of the transaction is the cost of the money you’re using to make the first purchase.
Each of these transactions should be thought about carefully so you can make sure you get the best deal. Let’s say you did a great job negotiating a fair price for the car. Now, we’ll move on to paying for it, either by using your own money or getting a loan.
When you think about the value of the car, you need to look at other cars and compare what features they have to offer, like power windows, airbags, etc. Every car make and model is unique, so you need to think carefully about the differences between them before deciding how much money you’re ready to spend on a particular vehicle. When it comes to the cost of the money (through a loan), cash from every bank works the same way.
Here’s a description of the product you get from the bank. It is green paper called money, a paper check, or a bank money transfer. It’s the same regardless of which bank you take it from. It doesn’t matter where the money is coming from, whether it’s a dealer financing deal, a bank loan, a credit card, a second mortgage, or even if you borrow it from your neighbor. The only thing to think about when looking at each loan is how much it costs. How much will you actually have to pay for using that money to buy the car?
Comparing Credit Card Rates With Auto Loan Rates
Let’s just say for the sake of this example that you’re buying a used car and you need to finance $9,500. Used car loan interest rates that you’re able to get range from 6.95% to 16.63%, with the average interest rate being 9.95%. After checking your car financing options with many banks, you may discover that the best rate that you can get is 10% at that time. But you also have a credit card offer from one of your cards for 4.9% for the next six months. You also happen to have more than $9,500 in an available credit limit at this particular time. So, the question is, should you use the 4.9% credit card offer to finance your car purchase? You bet! For at least six months in order to take advantage of the low-interest promotional financing rate.
The loan from the bank at 10% APR, with a starting balance of $9500 for three years, gives you a monthly payment of $306.54. After paying the loan for the next six months, you’ll still owe $8107.02. Now, the question you should be asking yourself right about now is how much would you still owe in six months if you take advantage of the credit card offer and make the payments of $306.54 per month? The answer to that question is $7877.02. So, that means you saved $230 just by using the credit card with a 4.9% interest rate for six months.
There are some people out there that may say, “So what, 230 bucks is not a big deal.” Well fine then, just go to the nearest bank branch and give the bank manager a donation of $230. It doesn’t feel too good, does it? What happened to the old saying “a penny saved is a penny earned”? So, if you could have gotten another $230 discount off the price of the car from the dealer, you’d be happy to take it and you’d be very proud of yourself and your great negotiation skills. The point that I’m trying to make is that you can find better things to do with the $230 saved, such as paying back other debts as an example.
Review Financing Options Before the Promotional Rate Ends
At the end of the six-month credit-card offer period, the rate will probably go up, so you’ll need to re-examine your financing at that time. You can always go back to that bank that offered you 10% interest and ask for a secured loan at that time to pay off the credit-card balance. But the bottom line is that you are locking in the $230 savings. Don’t finance your car blindly. Consider all your available car financing options carefully and you’ll be able to get the best deals and save a lot of money.