Paying off a car loan lends to greater financial freedom – knowing that you do not need to pay EMIs on your car and you own it completely now. It is no surprise that most of us look for ways and means to repay our car loans. Attractive credit card schemes lure us and we are often tempted to avail a credit card simply to transfer our car loan or other loans. But this move has its pros and cons, and it is important to analyze both in depth to avoid getting stuck in a vicious cycle of debt.
How to Transfer The Loan?
One of the most common ways to use a credit card to pay off a car loan or any other loan is to pay off the loan balance with a credit card and then transfer the balance of the loan to a 0% credit card. A balance transfer is where a part or whole of a debit balance (or debt) you owe to another lender is transferred from one card to another, usually to save money on interest repayments. Generally, balance transfer repayments are interest-free for a certain period of time after the transfer.
Another way is to use your credit card’s cash advance facility to pay off the car loan. However, cash advances generally incur very high-interest charges right from the start, without a cooling off period and, therefore, is unhelpful in loan transfers.
How Does it Affect Your Car Loan?
Let us understand what the above procedure means. In effect, you are paying off a secured loan (the car loan) with an unsecured loan (the credit card). You are eliminating the involvement of any collateral and thereby preventing your car from getting snatched away in case you default. This is because a credit card is an unsecured loan i.e. it does not have any collateral attached to it.
How Does it Affect Your Credit Card?
Auto loans are generally of the order of high amounts, often in several lakhs. Transferring such a high car loan to your credit card will result in your credit utilization becoming high, which you should generally avoid if you want to maintain a good credit score.
What is The Advantage?
- If you manage to transfer your auto loan to a 0% credit card and pay off the outstanding regularly, it means that you have paid off your car loan without incurring any interest charges.
- Also, you eliminate the risk of your car being repossessed by the lender in case of a default.
The idea to pay off personal loan with balance transfer thus results in significant cost savings and higher degree of security.
What is The Disadvantage?
- Due to the large value of the outstanding credit, there is a high possibility that you are unable to meet monthly payments. The credit outstanding will accumulate in such situations, leaving you in a vicious cycle of debt.
- A large credit outstanding will negatively impact your credit score. This will make it difficult for you to get loans in future.
- Most balance transfers charge interest at 0% only for a limited time period. If you do not repay the loan before this period, additional interest and penalties may be incurred, making the cost of loan repayment even higher.
Technically, using a credit card to pay off an auto loan is possible. In fact, using a credit card to pay off a student loan, using a credit card to pay off a bank loan, or using a credit card to pay off a personal loan is possible. But the real question is whether you have the payment capability to play within the rules and extract a financial advantage by using a credit card to pay off the loan.
Shiv Nanda
Nov 04
Shiv Nanda is a financial analyst at MoneyTap who loves to write on various financial topics online. He also advises people on financial planning, investment choices and budgeting skills, and helps them make their financial lives better.
Can you pay your auto loan with a credit card? Well, yes… technically, you can. Most lenders won't allow you to use a credit card to pay your loan directly, but you know those convenience checks your credit card company sends in the mail, encouraging you to transfer a balance? You can use one of those in a pinch -- just be prepared to bite the bullet and pay whatever fee it entails.
Likewise, tapping your credit card's cash advance limit is another way to make your car payment when money's tight -- but remember there's no grace period for cash advances, so that balance starts accruing sky-high interest charges immediately. And these days, some services allow you to pay just about anything with a credit card, even your rent -- for a fee, of course.
So no, the question isn't whether you can pay your car loan with a credit card. It's whether you'd want to.
There are some cases where it could make sense. Imagine you open your mailbox and find two pieces of mail -- one is your car payment, and the other is a 0% APR credit card offer. As you open both and compare them side-by-side, a lightbulb goes off. In the perfect world, you would transfer your car loan to a 0% APR credit card, avoid interest charges, and pay off your car loan, right?
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Paying your auto loan with a credit card might sound crazy, but this strategy isn't that off-the-wall. In fact, many people do this for various reasons all the time.
Some people do it for their savings; by paying off their expensive car loan with a card that charges 0% APR, they can save money on interest and get their car paid off faster. Others do it for the flexibility; perhaps they're unhappy with the monthly payment on their vehicle and want the option to pay more or less each month. And of course, some do it out of desperation: If money's tight one month, it's probably better to pay your auto loan with a credit card than to miss a payment and suffer the ding on your credit report or risk default.
However, as with most financial strategies, there are notable downsides to consider when you pay your auto loan with a credit card. What are they? Keep reading to learn more.
While saving money is almost always a good thing, paying your auto loan with a credit card isn't the no-brainer it sounds like. For starters, this financial move changes the nature of the loan itself. By transferring your auto loan to a credit card, you're taking a secured loan and turning it into revolving credit. On the upside, this means your car can't be repossessed if you quit paying your bill. However, simply moving the debt can wreak havoc on your credit score -- in a number of ways.
For starters, credit scoring companies view revolving debt (such as credit card balances) very differently from installment loans -- and not in a good way. In general, steady installment loans (like car payments, student loans, and mortgages) are better for your credit score as they add an on-time payment history to your credit report, according to Experian. Installment loans can also diversify your credit mix -- a factor to your credit score -- especially if you've used credit cards as a primary form of payment.
Another impact on your credit score could be the result of increased credit utilization. By transferring your car loan to a credit card, you're charging up a huge balance that wasn't there before. Since how much you owe on your credit cards helps determine your score, increasing your credit utilization could cause your score to drop.
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Yet another reason you might want to refrain from charging your auto loan on a credit card is that it may not save you money in the long run. Scoring a 0% APR offer and transferring your balance might save you money in the short term, but what happens when your introductory APR resets? If you don't have a plan to pay off your car within your credit card's 0% APR introductory period, you could end up paying huge interest payments every month -- far higher than the typical auto loan.
Another important drawback to consider is the precedent set by paying your auto loan with a credit card. While moving balances around might make you feel like you've paid off debt, you haven't really accomplished much -- yet. In reality, balance transfers are really nothing more than a shell game if you don't take your debts seriously. And if you let your balances grow as you bounce them around, you won't end up any better off.
If you don't have a concrete plan to pay your auto loan off, chances are good transferring your balance won't really help you. Instead of moving money around, you might be better off changing your money mindset. To really handle your debts, you need to pay them off -- not just move them from place to place.
Fortunately, most auto loans allow you to prepay your bill without a penalty. This means you can pay more than your car's minimum monthly payment if you can afford it.
This may not be easy, but hardly anything worth doing is. If you're struggling to scrape together the cash for your car payment, consider these steps to leave some wiggle room in your budget:
Look for easy ways to reduce your spending.
If you're tight on cash, look for ways to spend less. Easy categories to cut are food and entertainment. Could you save money by cooking at home and dining out less? Could you shop sales and save money on food? If you're heading to the movies a few times each month, you could save considerable sums of money by renting a movie from Redbox, stream free movies and TV shows from network streaming services, or -- if you still have them -- revisit your DVD collection instead. Take a look at all of your spending to find easy ways to save, then follow through.
Start using a monthly budget.
While nobody likes the idea of budgeting, the act of planning your spending can make a huge impact on your finances. Zero-sum budgeting, for example, helps you give each dollar a "job" and reduces waste in the process.
Try to earn more money.
Killing your car payment could be as easy as picking up part-time work, more hours at your current job, or a side hustle during your spare time. Any extra cash you earn can -- and should -- be thrown at your car loan if you're serious about paying it off.
[This article was first published on The Simple Dollar in 2020. It was updated in July, 2022.]
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