It is possible to use a credit card to make a down payment on a car. However, there are several drawbacks. For starters, some dealers limit the amount you can charge on your card.
Additionally, it’s really only a good idea to do this if you can pay off the balance quickly because credit cards tend to have high-interest rates. Therefore, if you don’t have cash on hand for a down payment, it’s better to get an auto loan for the entirety of the car’s purchase. This is because a car loan tends to have lower interest rates than a credit card.
However, there are some situations where using a credit card to put a down payment on a car makes sense. Accordingly, we’re going to review the pros and cons of using a credit card for your car down payment.
Pros:
Earning credit card rewards
The requirements for down payments vary depending on whether you’re leasing, buying new, or buying used. In some cases, a lender may request that you put as much as 20 percent down on a new vehicle’s total price because the car depreciates so much in value. As a result, your down payment may be several thousand dollars.
If you have a rewards credit card or a cashback card charging several thousand dollars will see you reap significant benefits. For example, if you put down a $5000 down payment and your card gives you 2% cashback, you’d make $100.
Low APR
Credit card companies will frequently offer special introductory offers such as a 0% annual percentage rate (APR) for purchases you make in the first 18 months. This means if you charge your down payment, you won’t have to pay any interest charges.
As a result, you’ll experience significant savings, particularly since auto lenders may offer you a less favorable rate on the entire amount you borrow if you don’t make a down payment.
Cons:
You’re financing 100% of the price of the car
If you can’t pay off your credit card immediately when using it to pay for the down payment on your car, then that means you’re borrowing money to finance both the down payment and the remaining cost of the vehicle. As a result, the entire vehicle is financed, and you automatically owe more than the car is worth.
What to Consider Before Using Your Credit Card for A Down Payment
There are more pros than cons when it comes to using a credit card for the down payment on a car. However, it would be best to consider the credit card’s interest rate when weighing the pros and cons.
Before you borrow, you must find out what the interest rate is on your credit card. This is because the interest rate will affect your overall vehicle costs and your monthly payment. Consider the following situation:
If you bought a car at $36,270 and gave a down payment of 20%, you would need to charge $7254 on your credit card. Assuming that you have a 12-month 0% promotional APR, you would need to pay $604 per month to pay off the down payment before the promotion expired. This would be on top of the car loan, which would amount to approximately $550 monthly if you borrowed the remaining $29,016 for 60 months at a rate of 5.15%.
In this case, it might be more prudent to take out a car loan with a low or no down payment requirement so you can have more affordable monthly payments. However, you may have to pay more in interest over the long term if you’re charged a higher interest rate because of a lack of down payment.
Conclusion
It is possible to use a credit card to put a down payment on a car, and there are many pros to doing so. However, you should really only use a credit card if you can pay the balance off right away. Otherwise, you’ll end up owing more than the car is worth and have higher monthly payments.