Paying off a car loan with a credit card may seem like a convenient option, but is it actually possible? In this article, we’ll explore the various ways you can pay a car loan with a credit card and the potential costs and benefits of using this payment method.
We’ll also discuss some alternative options for paying a car loan, so you can make the most informed decision for your financial situation.
Can you pay a car loan with a credit card?
Yes, it is possible to pay a car loan with a credit card. However, it may not always be the most practical or cost-effective option. Many car lenders do not accept credit card payments directly. Therefore, you would need to use a service that allows you to pay bills with a credit card, such as Plastiq or BillPay.
These services charge a fee for the convenience of using a credit card. The fees can range from 1.5% to 2.5% of the payment amount. This means that if you are paying a $400 car loan payment, you could end up paying an additional $8 to $10 in fees.
There are also some credit card issuers that offer the ability to pay bills with a credit card for free or for a reduced fee as a cardholder benefit. If you have one of these cards, you may be able to pay your car loan with a credit card without incurring any fees.
Be sure to consider the cost of using a credit card to pay a car loan before deciding to do so. If the fees are too high, it may not be worth the convenience of using a credit card. It may be more cost-effective to pay the loan with a check or electronic bank transfer, depending on the payment options offered by your lender.
Why consider using a credit card to pay off your car loan?
Most lenders don’t accept credit cards for car payments. However, it may be possible to do a balance transfer.
A balance transfer is when you transfer a car loan or existing credit card balance to another credit card. This process sometimes comes with added fees. A face value, it may seem like passing the buck (literally), but there are some practical reasons for balance transfers.
For example, if you have significantly improved your credit recently and qualify for a low interest credit card, a balance transfer is a way to reduce monthly credit card payments.
When it comes to addressing debt, the idea is that borrowers are only left to worry about the principal by simply “paying off” a car loan with a low or no-interest credit card.
This is a common way for individuals to work around a high monthly loan payment on low-risk debt such as car loans. Essentially, by moving debt to a credit card, ideally one with 0% interest, you will pay off the auto loan in full and forgo interest payments.
Using a credit card to pay off an auto loan may seem appealing, but it’s not without risks. There are several financial pitfalls to consider before using this payment method.
The Hidden Costs of Balance Transfers
In theory, transferring the debt to a low-interest credit card could result in considerable savings. However, when you perform a balance transfer, you aren’t actually paying anything off. You’re merely relocating debt from one pocket to another. Therefore, you will not reduce the overall balance at all, and you will not avoid any interest costs that you already incurred.
Balance Transfer Fees
A balance transfer credit card can reduce future costs by capitalizing on a low APR credit card or introductory 0% interest promotion, but this comes at a cost. Generally, you will face a balance transfer fee of 3% (or more) of the total balance being transferred.
Cash Advance
It’s also possible that your credit card issuer will treat it as a cash advance. A cash advance fee is typically 3% to 5% and comes with an APR of 25% or more. This means what seemed like a simple savings measure actually involves an expense you may not have accounted for.
0% Introductory APR
Remember that all good things must come to an end. Low rates usually don’t last with balance transfer credit cards. Many people will look to 0% APR credit cards to pay off an auto loan, celebrate their cleverness, and call it a day — but not so fast.
A no-interest credit card may seem like the answer to your financial prayers, but remember, this rate is typically a limited-time offer.
Promotional rates often only last 6–21 months. So, before charging a big-ticket loan to a credit card, make sure to evaluate whether you will be able to pay off the balance in the allotted window. If the auto loan balance carries over after the promotion, you will be in big trouble.
Standard APR Credit Cards
Student loans, a common debt that many people look to offset with a credit card, are normally lent at a 7% APR. After refinancing, this rate can drop to as low as 3%. The average credit card APR is 15%. Moving debt to a standard credit card, without the crutch of a promotional low APR, would nearly double interest payments.
Regardless, some people decide to move loans to credit cards with standard interest rates and incur the added cost to reap benefits like airline miles, fuel points, etc. Unless you intend to pay off the entire balance before interest charges accrue, this is generally not a sound idea.
Moving Debt to Credit Cards Will Affect Your Credit
Before moving a large sum to a credit card, you should consider its effect on your personal credit.
Credit Utilization Ratio
Building a credit history through credit card use and on-time payments is important in boosting your credit score. However, borrowing too much money can result in negative marks. Credit utilization ratio (CUR) measures how much money you owe versus the total potential debt you could incur. This metric derives from a simple equation:
Credit you’re using / amount of credit available = CUR
This number is a significant factor in your overall credit score. Therefore, it is recommended you only use 30% of your credit limit to maintain a healthy FICO score. In fact, borrowing too much money, even if it is within your credit limit, can negatively affect your credit score.
With this in mind, moving a large auto loan balance to a credit card will likely ding your credit score due to passing the recommended 30% borrowing threshold.
Technically, if you were to charge an auto loan to multiple credit cards you could avoid this issue. However, it is a little overly optimistic to expect to have multiple 0% APR credit cards at your disposal. Additionally, it makes no sense to move debt to a credit card with a standard APR.
Moving from Secured to Unsecured Debt
Transferring a car loan to a credit card also comes with a greater risk to your personal finances if you happen to lapse on your car payment. If, for whatever reason, money is tight and car payments start coming in late, you will experience a massive blow to your credit score.
Credit cards are “unsecured debt,” which means they are not backed by collateral. If you experience unexpected financial hardship after moving an auto loan to a credit card, there will be no asset to repossess, and your credit score will surely take the brunt of the fallout.
So, what should you do instead?
In general, it doesn’t make much financial sense to pay off debt with more debt. If you’re looking to decrease a car loan’s impact on your bank account, you’re probably better off re-evaluating your finances from the ground up. There is no “secret” to getting right side up on auto loans, and incurring more debt is not the answer.
Instead, think about establishing a budget and exceeding minimum payments. This way, you will dig yourself out of debt sooner. Furthermore, refinancing is a good way to decrease the financial burden of interest payments. Seeking credit repair services can help you regain control of your FICO score, and once you do, you can refinance at a lower interest rate.
We are led to believe credit cards are a magic wand — an inexhaustible bank account — that can resolve any financial issue. Unfortunately, this is not the case, so be wary of paying off loans with credit cards.
As an alternative, consider addressing the root of financial hardship. Reestablish yourself through tried-and-true measures such as budgeting and credit repair rather than rolling the dice on incurring additional credit card debt.
