It's smart to shop around when you're in the market for a new or used car. Beyond searching for the best price on the right car for your needs, however, you should also shop around for financing.
Unless you have enough cash saved up to pay for your new ride, you'll need an auto loan or personal loan to finance the purchase. And if you're feeling adventurous or are having trouble qualifying for such loans, you may even weigh the pros and cons of buying a car on a credit card.
Can you buy a car with a credit card?
Simple answer, yes. However, is it your best option?
Before buying a car on a credit card, you first have to find out if your dealership even offers that option. Most of the time, they won't let you charge the entire purchase price of your car -- instead, they'll allow you to put up to $5,000 of the purchase on a credit card. Second, you need to make sure your credit card limit is high enough to cover the amount you want to charge.
So, let's say you still think it's a good idea, are buying a $10,000 car, and have the ability to charge up to $5,000. To cover the rest of your car's purchase price, you'll need to come up with the cash or apply for a loan. If you're buying a cheaper used car, on the other hand, you may be able to charge the entire purchase price.
Like anything else, just because you can do something doesn't mean you should. Here are some instances where paying for a car with a credit card makes sense -- and when it doesn't.
Buying a car with a credit card makes sense if...
You're using a card with 0% interest on purchases.
With a 0% interest credit card, you could secure zero interest on your purchase for anywhere from nine to 21 months. If you charge $5,000 on a card that falls into this category, you could feasibly pay that portion of your car loan down during that time without paying a dime in interest charges.
However, before you go this route, you should make sure you can afford to pay off your car fairly quickly. If you don't pay off your charged balance during your card's 0% APR promotional period, you'll wind up paying credit card interest when your card's rate resets -- which is going to be far higher than the rate you'd receive on a good car loan.
You want rewards and have the cash to pay it off.
Let's say you're buying a relatively cheap car, to begin with, and you have the cash on hand. By paying for an inexpensive car with a rewards credit card and paying off the balance right away, you could earn valuable rewards without much effort on your part. Since most rewards credit cards offer kickbacks worth between 1% and 5% of a purchase, you could benefit handsomely with this one small move.
Your credit is good.
With good credit, you can qualify for a credit card that may make charging your car purchase worthwhile. As mentioned above, zero-interest credit cards offer an excellent opportunity to avoid paying interest on at least part of your purchase. If you're in it for the rewards, on the other hand, the best travel and rewards credit cards are usually only available to individuals with a FICO score of 720 or higher.
So, if you don't have an awesome 0% APR or rewards credit card already, don't despair. With a little research, you can apply for a great credit card before you walk into a dealership.
What's more, some of these cards offer huge sign-up bonuses worth hundreds of dollars to new cardholders who meet certain spending criteria -- for example, making $3,000 in purchases on a new credit card within the first 90 days. Charging part of your car purchase is a surefire way to meet those requirements in one fell swoop -- as long as you can pay it off.
You should not buy a car with a credit card if...
Your credit card charges a high interest rate.
If your credit card charges a high interest rate, you should consider dealership or bank financing instead of using your card. Many car dealerships offer special promotions that make financing downright cheap, and you may be able to qualify for a better deal with your bank. According to an ongoing study from Bankrate, the average interest rate on credit cards is over 16% as of March 2022. Surely your bank or dealership could do better than that.
You want to pay off your car slowly.
If you're hoping to pay off your car at a leisurely pace, a credit card probably isn't ideal. Since the average interest rate is well into the double digits, you'll pay a ton more interest over time if it takes you a while to pay it off. Most zero-interest credit cards offer 0% APR for nine to 21 months, so these introductory offers aren't long enough to help if you need four or five years to pay off your car.
You don't have good credit.
If you have bad credit, you should proceed with caution no matter what type of financing you choose. You may not qualify for the best rates with a credit card, traditional bank, or even dealership financing with bad credit.
The best thing you can do is shop around for the best rate you can find and save up the largest down payment you can muster. The larger the cash deposit you can come up with, the less you'll need to borrow and less risk you'll present to a lender. In the meantime, you can figure out ways to start boosting your credit score over time.
[This article was first published on The Simple Dollar in 2020. It was updated in March 2022.]