Most people are accustomed to using a credit card for everyday purchases and even some bills. But using a credit card to make car payments is a little more difficult. While some lenders accept credit card payments for monthly auto loans, not every loan company does.
Before making your car payment with your credit card, it’s important to understand the risks and possible pitfalls. For example, the lender might charge a credit card transaction fee, ultimately increasing the amount of money you’re paying for the loan.
In this guide, we’ll explain the pros and cons of putting your auto loan payment on your credit card, and suggest some alternative ways to make your payments.
Benefits of Making a Car Payment with a Credit Card
If your lender accepts credit cards, there could be some benefits to using this method of payment. Here are some of the potential pros of using a credit card to pay off your auto loan.
Pay off the loan balance over a longer period of time
Using a credit card for your loan payments can indirectly lower the amount of money you have to spend at one time. While banks require you to make car payments in full each month, credit card issuers allow you to pay only a portion of the total balance.
For example, if you charge your $500 monthly car payment on a credit card, you may only have to pay 10 percent or $50 this month, giving you a bit of a breather by providing more flexibility.
Save on interest with a 0 percent APR credit card
If you use a credit card with 0 percent APR to fund your monthly auto loan payments, you could end up financing your car purchase for almost nothing.
You would only have to pay a transfer fee, which is a fraction of the overall cost you might face during the length of your auto loan. Transferring an auto loan balance to a new credit card with a 0 percent APR promotional period could also help you save.
Earn credit card points and rewards
If you use the right rewards credit card to pay your auto loan, you could rack up an enormous amount of points. Once you have enough points, you can often convert the rewards to cash back, airline points, and other perks.
Before you start using your credit card to pay your auto loan, however, check with your credit card issuer to make sure this type of charge is eligible for rewards.
Drawbacks of Paying for an Auto Loan with a Credit Card
Before you decide to use your credit card to pay your car payment, it’s important to understand the downsides. Here are some things to keep in mind when you’re thinking about making your car loan payment with a credit card.
Potential for Excessive Debt
When you’re paying off a vehicle, the last thing you want is to get into a challenging financial situation. When you use your credit card to make loan payments, it’s possible to rack up a large amount of debt, especially if you can’t afford to pay the statement balance in full each billing cycle. Avoid putting your auto loan payment on a credit card unless you can afford to pay it off each month.
Decrease in Your Credit Score
Your credit rating is partially dependent on your credit utilization ratio, which is the amount of available credit you’ve used. When you exceed 30 percent of your credit card limit, your score takes a hit.
If you’re consistently using a credit card to pay your auto loan, be careful not to cross that 30 percent threshold. If you do, you will probably lose points on your credit score, which can increase your credit card interest rate.
Ways to Make Car Payments with a Credit Card
If your lender doesn’t accept traditional credit card payments for your auto loan, there are a few ways you can potentially work around their payment policy. Here are a few ways you can use a credit card to pay your car payment when your lender doesn’t accept card payments.
Cash Advance
To get a cash advance, you’ll need to find an ATM or bank teller that works with your credit card issuer. Then, you’ll withdraw funds from your credit card’s available cash advance limit (keep in mind that it’s likely less than your overall credit limit).
Next, you’ll deposit the money into whatever bank account you usually use to pay your bills. The cash advance amount will show up in your available cash balance so you can make your payment as usual. You can also use the funds to purchase a money order if you would rather mail certified funds to your lender for the loan payment.
When you get a cash advance, the bank will charge a fee based on the amount of money you withdraw. That transaction may incur higher interest rate charges than other purchases on your credit card. Also, you don’t get a grace period with a cash advance, so interest starts accruing immediately.
Balance Transfer
Another way to pay your auto loan is to use a balance transfer credit card. If you have a high enough credit limit, you could transfer your entire auto loan balance to a credit card. However, most credit card companies charge a 3 percent balance transfer fee (or a flat rate).
If you can take advantage of a no-interest promotional period, you could potentially pay off your car loan interest-free with your credit card. However, you must ensure the balance is paid in full before the offer expires to reap the rewards.
Convenience Check
Some credit card companies allow you to make loan payments with convenience checks. A convenience check is just like a traditional check, but the money comes from your available credit balance, not your cash reserves.
There are two ways you can make your monthly car payment with a convenience check. You make the check payable to yourself, deposit it into your checking account, and then make your car payment like you normally do. Another option is to make the check out to your lender, put it in an envelope, and send your payment in the mail.
Other Car Payment Options Using a Credit Card
Many lenders don’t accept credit card payments due to the high transaction fees. If your lender doesn’t take card payments, ask if they can accept payment through a third-party credit card processor, like one of the following companies.
Plastiq
Plastiq is a payment platform that lets you pay merchants with your credit card. After you sign up, you can add your credit card to your account, then set up your auto lender as a payee. Even if your lender isn’t a Plastiq member, it can still receive car payments through this service. Set the payment day and how you’d like Plastiq to send the money, either by:
- Check
- Bill pay transfer
- ACH transfer
- Wire transfer
While Plastiq’s fees vary depending on your payment method, you can expect to shell out 2.85 percent or more for most transactions. In addition to these fees, credit card issuers may charge cash advance fees, and you can’t use an American Express card to make car loan payments through Plastiq.
PayPal
PayPal is one of the most well-known payment platforms. If your auto lender accepts auto loan payments through PayPal, you can set your credit card as a funding source before you complete the transaction. PayPal doesn’t charge any extra fees to make a commercial transaction, so it won’t cost you any more than it would to send money to your friends.
Cash App
Cash App is another option you can use to make your loan payment with a credit card. It’s more versatile than PayPal because your lender doesn’t have to partner with Cash App to accept payments.
However, it’s also more expensive. You might pay a fee of up to 3 percent for credit card payments when you use Cash App for loan payments.
Should You Use a Credit Card for Auto Loan Payments?
For most people, it’s best to avoid using a credit card to pay off your auto loan. Unless you have a high credit limit and you can afford to pay off the balance in full each month, consider your credit card as a last-resort option for making your monthly payment.
While you could potentially save on interest, there are pretty significant risks if you still have a balance when the promotional period expires.
There are many other ways to fund your auto loan that are less risky than using a credit card. Before you choose this option, weigh the benefits and drawbacks, and crunch the numbers to figure out if using a credit card can actually help you save money.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
Source: www.caranddriver.com