Not everyone is lucky enough to be able to pay the whole cost of a car outright. Thanks to the lending firms, you can finance it by arranging a 10% of the market value of a car you want to buy as a down payment.
However, amidst the rising cost of living, it seems a bit challenging to arrange money for the down payment. Because a car purchase could be a part of the necessity, you may be tempted to finance it with a credit card.
In fact, you may have met some people who have done this, and you would be thinking of following in their footsteps, but beware. It seems very easy, but it is not. The devil is in the details. Before you finance a down payment with your credit card, you should carefully look at the pros and cons.
Why credit cards may not be a suitable funding source?
If you do not have enough savings to pay for the down payment on your car, you should put off the idea of buying a car. It is not suggested to finance the down payment of your car with a credit card. Here is why:
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It is a double whammy
Charging a down payment for a car on your credit card will be proven a double whammy because you do not have just to pay the down payment of the car but interest on top of that. Most of the credit cards require you to pay off the balance in a lump sum.
You will likely face difficulty settling the full dues at once. Even if your credit card issuer allows you to pay in monthly instalments, it may still prove to be a blow to your budget. While you will be paying down an auto loan, making credit card instalments will pose a threat to your budget.
Understand it by another scenario. Assuming that you have made the down payment in cash from your savings, now you are to pay only a monthly instalment toward your auto debt worth €1,563. It is undoubtedly much more affordable than when you are to make an additional payment worth €999 every month for a period of six months on top of €1,563.
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You could be fooled
A lender may prohibit you from using a credit card to finance the down payment because it will ultimately make it difficult for you to keep up with the payments of bad credit card finance in Ireland, but car dealers are not that stringent. They can even allow you to use a credit card to finance a down payment.
They will act as if it is not a big deal but do not forget that you will end up paying a high-interest rate. It is not a big deal for them only. Before you decide to charge your down payment on a credit card, make sure that you know how much you are going to be charged and whether you will be able to pay off the debt or not.
Remember that interest rates may vary by individual. You may find that 9.59% interest is fair to charge on a credit card, but on the other hand, it is outrageously high compared with a car deal with 0%interest free.
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Your credit score will be brutally affected
Using your credit card to buy anything means adding to your credit utilisation ratio. A rule of thumb says that you should not have used more than 30% of your credit card limit. If you use a credit card to pay for the down payment on your car, your credit utilisation ratio will go up. Your credit score will plummet.
If you are to borrow money from lenders in Ireland to fund an emergency, you may not get signed off on. However, plummeting credit scores will also make it difficult for you to get an auto loan at a lower interest rate. Your current credit score will be checked whether you borrow money from a lender or a dealer.
Can you use a credit card to pay off an auto loan?
People use credit cards either to finance a down payment or to pay off an auto loan. You have understood that credit cards should not be used to finance a down payment for a car, but some people use them to pay down a car loan’s instalments. It could have both upsides and downsides.
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You can save money on interest
Transferring your auto loan to a credit card can help save money, provided you use a 0% introductory APR. You can avoid paying interest charges provided you pay off the balance within the interest-free period.
However, the total cost of the loan may not fit such credit cards. This alternative is usually available to you only after paying down half of the auto loan. You must already have a good credit score to qualify for a 0% introductory APR credit card.
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Balance transfers come with a fee
You may be liable to pay 3 to 5% of the total amount you transfer to a credit card as a transfer fee. Technically, you are not saving any money on interest by transferring the balance. This may be even more than the total amount you save on interest.
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It can lower down your credit score
Car debt is not a small amount. Putting them on a credit card will increase the credit utilisation ratio. This will plummet your credit score and, unfortunately, may have a long-term impact. It means you will not be able to borrow money at affordable interest rates.
To wrap up
A credit card is absolutely not an appropriate funding source for a car, especially if you are using it to finance a down payment on your vehicle. You may think of using it to pay an auto loan, but make sure it does not lower your credit score and you are actually saving some money on interest.
Caleb works as a senior content writer at Financealoan for the past 3 years. He is a writing enthusiast and invests a good time in exploring and writing about financial trends. His keenness in exploring a topic to create a research-based piece is simply unmatched. He believes in including a texture of authenticity with real-time examples and facts.
Caleb’s blogs and articles reveal deep-seated knowledge and expertise. His educational qualification forms the base of his excellent command over the industry and Jargon. He is a postgraduate in Finance and is currently involved in exploring the world of the stock market.
