Buying a car can be incredibly exciting! Whether it is brand new or used, it is also nice to have a new way to get around town. However, the purchasing process can be challenging or stressful for those who haven’t done it before or are on a tight budget. When you are using an auto loan to purchase your new vehicle, it’s a good idea to familiarize yourself with everything you need to know beforehand.
How much money you have for a down payment can significantly affect what your car loan looks like. Borrowers who have limited funds for a down payment sometimes wonder whether they can use a credit card to cover it.
Do You Need a Down Payment For a Car Loan?
A majority of auto loans require some kind of down payment. Most financial experts suggest 20% of the car price as a good down payment to aim for. Depending on your credit score and the financial institution you are getting your loan from, it may be possible for you to qualify for a smaller down payment. You might be eligible for a no-down payment loan if you have extremely good credit.
However, just because you qualify for a low down payment doesn’t necessarily mean it is the best financial decision. In actuality, putting more money down will significantly improve your car loan in several ways.
A Large Down Payment Is Better
Paying a smaller percentage of the purchase price will mean your loan balance will be larger, meaning you may be paying a more substantial monthly payment. The more significant your down payment on your car purchase is, the smaller your loan amount will be with more affordable monthly payments.
A larger down payment could also secure you a lower interest rate from some auto lenders. If you are willing to put more money down immediately, they may lower your rate after your application and be more flexible in your loan’s terms.
Can You Use a Credit Card For a Car Down Payment?
If you are short on cash and considering using a credit card to complete your down payment, you will need to look into whether it is even possible. While there is no hard and fast rule regarding the use of credit cards for down payments, many car dealers and auto lenders don’t accept credit cards.
After confirming whether your car dealership or lender allows it, you will then need to look into whether you have a credit card with a credit limit high enough to cover the down payment. If you don’t currently have an available credit limit substantial enough, you may need to apply for an increase or a new credit card, which could impact your credit scores.
If everything lines up perfectly for you to make a down payment on a car with a credit card, you will still want to take a pause to consider whether you should run up a credit card balance that high.
And Should You?
As the saying often goes: just because you can, doesn’t mean you should. It’s essential to consider every angle when making a big personal finance decision. To determine whether the benefits outweigh the risks, you should explore every angle and the costs you may not have considered.
Even when you find car dealers and auto lenders that accept credit cards, the car dealerships will likely need to pay transaction fees for credit card processing which they will add to your bill. Simply by using a credit card, you could have a 2%-3% surcharge added to your bill.
Credit Card Interest Rates vs. Auto Loan Interest Rates
Generally, auto loan interest rates are going to be lower than credit card interest rates. Making your down payment with a credit card could have you paying interest at significantly higher rates than if you simply put less money down.
Your credit card has a variable interest rate meaning the credit card issuer changes the rate depending on the market or your credit score. Depending on the circumstances, you could end up with an interest rate on your credit card balance as high as the rates charged on an online cash advance or loans for bad credit.
The one way you might be able to find a credit card interest rate lower than the average auto loan is if you were to leverage a 0% APR introductory period. If you put the down payment on a credit card with a 0% APR, you could pay off the remaining balance by the time the promotional period ends, so you never have to pay interest at all.
Possible Consequences of Using A Credit Card For a Down Payment
There are several things that can go wrong when you use a credit card for your car down payment. Once you’ve purchased the car and driven off the lot, you will need to start preparing yourself to handle the auto loan monthly payments. If you paid for the down payment on the car with a credit card, then you will not only need to be concerned about the auto loan but also the credit card payments.
Instead of one payment a month on your car, you will have to juggle multiple payments. Your credit card balance will be growing in size due to interest at the same time as your car loan. Therefore, you pay more and more money as time goes on.
Is There a Benefit of Using a Credit Card?
One of the sole benefits of using a credit card for the down payment on a car is the ability to earn credit card rewards. The possibility to earn rewards on a large purchase, like the cost of a down payment, might be tempting to many. In the grand scheme of things, you are unlikely to make enough money through credit card rewards to balance out the costs associated with the use of a rewards credit card, such as the increased interest rate and possible annual fee.
The only way to offset the risks and costs would be to avoid interest altogether through a 0% APR promotion. In all other instances, putting the down payment on a credit card is most likely a terrible idea.
Avoid The Risk By Using an Alternative To a Credit Card
If you wish to avoid of the risk of making your down payment with a credit card, there are several alternatives for borrowers who don’t have quite enough extra cash lying around. Not relying on a credit card could save you more money in the long run and keep your financial situation above water, so you don’t accrue more debt than is absolutely necessary.
Here are a few solutions that might help you manage your car down payment without turning to a credit card company:
Buy a Used Car
It might be tempting to get a brand new car, the latest one on the market with all the most recent tech. However, getting a used car loan could secure you a lower down payment and more affordable monthly payments. A used car’s purchase price is significantly lower than a brand new one, so it might be more feasible to cover your car’s down payment without a credit card.
Take More Time To Save
It might be a wise idea to spend a little bit more time saving up so you can pay cash for the down payment. It might mean that you have to hold out a while longer before purchasing your new car, but it could be worth the wait for the money you might save on interest charges.
Use Trade-In Value As Down Payment
If your current car is still in good working condition, you could sell it and use the money you get from the trade-in value to pay for the down payment on your new car. Doing what you can to get the highest purchase price on your old car may even enable you to make a bigger down payment on your new car loan.
Qualify For an Auto Loan With No Down Payment
As mentioned above, there are some car loans with no down payment required. But you might not have the credit score needed to qualify for a little to no money down auto loan. One possible solution is to have a close friend or family member co-sign your loan. If your co-signer has a high enough credit score, you may be able to qualify for absolutely no down payment or at least a smaller down payment that is more affordable.
Whether you end up looking into used cars or saving up a bit more money, being smart about big financial decisions like buying a new vehicle will benefit you in the long run. Each and every wise choice you make now will contribute to your financial stability and overall quality of life in the future.