When considering purchasing a car, many wonder if they can use a credit card. While it may seem unconventional, buying a car with a credit card is technically feasible in certain situations. However, it often comes with caveats and considerations due to credit limits, merchant acceptance, and potential fees.
This article explores the possibilities and limitations of using a credit card to buy a car with insights into when it might be advantageous and when alternative financing methods may be more suitable.
Can you buy a car with a credit card?
Yes, you can buy a car with a credit card in Canada, but it depends on the dealership's policies.
Dealership policies
Not all dealerships accept credit cards for the full purchase price of a car. Some may allow a portion of the payment using a credit card, while others accept the entire amount.
Credit limit
The purchase price of the car must be within your credit card limit. Going above the limit results in your credit card being declined. High-value purchases might require a significant credit limit.
Rewards and points
Using a rewards credit card could be beneficial if you have a rewards card that offers cash back, points, or travel miles. However, the rewards might not outweigh the potential fees and interest if you don't pay off the balance quickly.
Interest rates
If you don't pay off the credit card balance immediately, you'll incur interest charges, which can be significantly higher than other financing options. Learn how credit card interest is calculated to understand interest charges for outstanding balances. You can negotiate your credit card interest by using credit responsibly, like paying credit card debt on time and building a strong credit profile.
Credit limit and down payment considerations
Credit limit
Ensure your credit card has a high enough limit to cover the purchase or the portion you intend to charge. For example, if the car costs $30,000 and your card's limit is $10,000, you can only charge up to $10,000, assuming the dealership allows partial payments via credit card.
Charging a large amount to your credit card can significantly impact your credit utilization ratio (the amount of credit you're using compared to your total available credit). High utilization can negatively affect your credit score. It's recommended to keep your credit utilization below 30%.
If your current limit is insufficient, you might consider requesting a credit limit increase from your card issuer. This process can take time and isn't guaranteed to be approved.
Down payment considerations
Some car dealerships may only allow a certain portion of the car’s price to be paid via credit card, often as a down payment rather than the full amount. Confirm with the dealership what their policies are regarding credit card payments.
You might use your credit card to make the down payment and finance the remaining balance through a car loan. For instance, if you're purchasing a $30,000 car, you could put $5,000 on your credit card and finance the remaining $25,000 through a loan.
Compare the interest rates of using your credit card versus a traditional auto loan. Credit cards typically have higher interest rates than car loans. Additionally, some dealerships might charge a processing fee for credit card transactions, which could increase your overall cost.
Car loan vs. credit card
Getting a car loan
When considering a car loan to finance a vehicle purchase, there are several advantages to weigh. Car loans typically offer lower interest rates than credit cards, making them a more affordable long-term financing option.
They also come with fixed monthly payments, which can help you budget more effectively and manage your finances over the repayment period. Additionally, car loans often offer longer terms, which can result in lower monthly payments, depending on the amount financed and the terms negotiated with the lender.
Using a credit card
Using a credit card for a car purchase offers convenience and flexibility, especially if you have a high credit limit. It allows you to finance the entire purchase without needing an immediate down payment, provided your credit limit is sufficient. Some credit cards also offer rewards such as points, cashback, or travel miles on your purchase, which can be advantageous if you manage the balance responsibly and pay it off in full each month.
Credit cards typically come with higher interest rates compared to car loans, making them a costly option if you carry a balance each month. They also have variable interest rates that can increase over time, adding to your financial burden.
Charging a large amount to your credit card can significantly increase your credit utilization ratio, potentially lowering your credit score temporarily. Unlike car loans, credit cards do not offer structured repayment terms, which means you'll need to actively manage the balance to avoid accumulating high-interest debt.
Benefits of buying a car with a credit card
Using your credit card responsibly for a vehicle purchase has several benefits.
Convenience and speed
Using a credit card for a car purchase can be convenient and quick, especially if you have a high credit limit that covers the entire cost of the vehicle. It eliminates the need for lengthy loan approval processes or negotiations with lenders.
Consumer protections
Credit cards often come with consumer protections such as extended warranties, purchase protection against damage or theft, and dispute resolution services. These protections can provide additional peace of mind when making a large purchase like a car.
Deferred interest or introductory offers
Some credit cards offer promotional periods with 0% APR or low interest rates for new purchases. If you can pay off the balance within the promotional period, this can save you money on interest charges compared to traditional car loans.
Flexibility in payments
Credit cards offer flexibility in terms of repayment. You can choose to pay off the balance over time with minimum payments or pay it off in full without penalties. This flexibility can be advantageous if you have other short-term financial priorities.
No down payment required
Depending on your credit limit and the dealership's policies, you may not need to make a down payment when using a credit card, which can be beneficial if you prefer to keep your savings liquid or invest them elsewhere.
Drawbacks of buying a car with a credit card
High interest rates
Credit cards generally have higher interest rates compared to traditional car loans. If you carry a balance on your credit card from month to month, you could end up paying significantly more in interest charges over time compared to a lower-interest auto loan.
Potential fees
Some car dealerships may charge a processing fee for credit card transactions, which could add to the overall cost of purchasing the car. These fees can offset any rewards or benefits you might gain from using your credit card.
Lack of structured repayment terms
Credit cards do not typically offer structured repayment terms like car loans. While you have the flexibility to pay off the balance over time, the minimum monthly payments may not be enough to pay off the debt in a reasonable timeframe, leading to prolonged interest charges.
Risk of overspending
Credit cards can make it easier to overspend due to their high credit limits and revolving nature. Buying a car with a credit card may tempt you to spend beyond your means, potentially leading to financial strain if you cannot pay off the balance quickly.
Limited acceptance
Not all car dealerships accept credit cards for large purchases like cars, or they may limit the amount you can charge. You may need alternative financing options or methods of payment, complicating the purchase process.
KOHO can help you buy your dream car
Purchasing a car is a significant financial commitment, involving substantial upfront costs, ongoing maintenance, and fuel expenses. If you're in the market for a new vehicle and need assistance with financing, KOHO is here to help.
We provide various tools and resources to help you build a strong credit profile, increasing your chances of securing a loan. Our virtual credit card and overdraft protection coverage are excellent tools for improving your credit profile and helping you with unexpected expenses, provided you use your credit card responsibly and repay cash advances on time.
With KOHO, you can monitor your credit profile through a free credit score report, helping you stay on track toward your desired credit score. Your credit report offers valuable insights into the factors affecting your score, how it has changed, and steps you can take to improve it.
You can also apply for a high-interest savings account and earn interest at a competitive rate on every dollar. Your savings account is a great tool to help you save for a down payment on a vehicle so you can get a smaller car loan and reduce your debt.
Build your credit with KOHO, and let us assist you in financing the car of your dreams. KOHO for businesses provides enterprise financial solutions to help your company manage finances effectively. Learn more about the different plans for spending and saving today.