One of the most frustrating aspects of paying off your car loan is knowing that a size-able portion of your monthly charge is going towards paying the interest.
It’s rare to find anyone who doesn’t look at their car loan and think “if only I could pay this off today!” Unfortunately, short of winning the lottery, most of us aren’t in a position to clear our car loan at the early stages of the loan.
We do regularly get people looking to clear their balance asking us the question “Should I use a credit card to pay off my car loan?”
It can seem like a very attractive option, as one of the biggest benefits to clearing a car loan with a credit card is the option to benefit from a 0% rate period. By the end of this article you should know if using your credit card to pay off your car loan is a good idea!
Paying Off a Car Loan With a Credit Card
Paying a car loan with a credit card is a great way of doing a balance transfer in order to lower your interest rate.
- There are a couple of ways that you can pay your loan with a credit card. These are paying a direct credit card payment or processing a formal balance transfer.
- Not every lender will accept a direct credit card payment so you will need to check whether your lender accepts credit card payments.
- One of the biggest benefits of making a direct credit card payment is that you will avoid paying a transfer fee.
- If yours is a lender who does allow you to pay directly you can simply pay off your remaining balance over the phone.
- If your lender does not take direct credit card payments you will only have the option of a formal balance transfer.
- This will incur fees but it still allows you to gain the benefits of you the lower interest rates.
- The method you use to do this will vary depending on your credit card provider.
- Generally, you will have access to this on your online portal, although you may need to make a phone call.
- Your credit card provider will need to know the name of your current lender, the account number and the balance you would like to transfer to your credit card.
Why Should You Pay Off a Car Loan With a Credit Card
As paying a car loan with a credit card is a way of doing a balance transfer in order to lower your interest rate it is only worth doing if you save money.
- If you want have the option of taking advantage of a 0% interest rate introductory period you will likely save a bunch of money.
- This is a great option if you know you have the discipline to pay the entire loan during this time.
- You will own your vehicle as soon as the balance has been paid.
- During the length of your car loan, your car is the asset which can be repossessed if you do default on your loan.
- Moving the balance to a credit card saves you from the risk of repossession during the time you are paying your car finance.
- This is because your credit card is classed as an unsecured loan, which means that if you do default you don’t risk losing your car.
- You would still be wise to ensure you do keep up with payments, however, because missed credit card payments and defaults will seriously hurt your credit score.
Why Shouldn’t You Pay Off a Car Loan With a Credit Card
In some situations you won’t save money or the savings you do make will not be worth the hassle or risk of moving the balance to a credit card.
- One of the biggest downsides to paying off a car loan with a credit card if the balance transfer fee.
- If your lender allows you to pay the balance directly with a card you do not have to worry about this, but for most this will be a stumbling block.
- Most credit card companies charge transfer fees around 3% to 5% of the overall loan.
- It is important to factor this amount in to the amount you expect to save so that you can be sure you aren’t going to pay a higher amount in the long run.
- If you aren’t disciplined enough to pay off the balance in the 0% interest period you are going to put yourself at risk of higher fees.
- Standard credit card interest rates are generally higher than you would expect to pay on a good car loan.
- Moving into the standard interest rate period is likely to leave you paying more than you would have originally done.
- Make sure that you can afford to pay your balance off in the 0% interest period and be disciplined with your payments so that you do make savings.
Paying off your car loan with a credit card can be a very tempting step to take. Full ownership of your vehicle and potential savings on interest – yes please! But before you take this step you need to make sure that you are actually going to make savings.
Make sure you factor in the extra fees involved in transferring your balance as you do not want to risk being hit with extra interest charges after the interest free period. The good news is that if using a credit card is not the best option for you then car loan refinancing may be more suitable.