How Do Credit Cards Work for Auto Loans?
Before we start, it’s important to take note that not all lenders accept credit cards for auto loans. That’s why if you are looking to pay off an auto loan with a credit card, it’s best to call the lender directly and ask about its specific policy.
There are two ways you can use a credit card to pay off an auto loan.
Using a Credit Card with a 0% APR
The first way is to use a credit card with a 0% APR. This is called “0% APR financing,” or sometimes referred to as “0% APR credit card.” This type of card is a great way to pay off an auto loan because you don’t have to pay interest. Unfortunately, most credit cards with 0% APR have limited use and aren’t available for everyone. Plus, this setup is only ideal for short-term auto loans because the 0% APR offer only lasts between 6 months and 18 months.
Credit Cards with 0% APR in Canada
- MBNA True Line Master Card – 0% APR for 12 months and $0 annual fee.
- CIBC Select Visa Card – 0% APR for 10 months and a $29 annual fee.
Credit Cards with very low APR in Canada
- Tangerine Money-Back Credit Card – 1.95% APR for 6 months and $0 annual fee.
- BMO Rewards® MasterCard – 1.99% APR for 9 months and $0 annual fee.
Using Your Credit Card’s Cash Advance Feature
The second way to pay off an auto loan with a credit card is to use its cash advance feature. This works by allowing you to borrow a certain amount of money from your credit card and then pay it back at a later date. You are technically borrowing the money from your credit card and then paying it back with interest. The only downside to this method is the very high transaction fees and interest rates, making it less-than-ideal for most people.
Pros of Using a Credit Card for an Auto Loan
If you have a credit card with a 0% APR, you can save a lot of money on your auto loan payments. However, it’s important to take note that due to the limited nature of this offer, you’ll be forced to pay off the loan within a certain time frame. You are also converting your auto loan into a revolving credit, which is very different from a secured loan.
Revolving credit works by carrying over your outstanding balance from month to month. For as long as you’re paying the minimum monthly payment, you won’t incur any penalty. This is great if you can diligently pay off your loan on time. However, if you fall behind on your payments, you’ll end up being hit by high-interest rates, penalty charges, and other types of fees.
Cons of Using a Credit Card for an Auto Loan
Probably, the biggest downside of using a credit card to pay off an auto loan is the possibility of your credit score being affected. This is because revolving debts and other unsecured loans are seen as very risky by the credit bureaus.
In addition, since the 0% APR offer only lasts for a very limited time, you’ll have to pay off the loan interest in full in a matter of months. And, if you fail to keep up with the high minimum monthly payments, you may end up in serious debt. 0% APR credit cards are also very difficult to qualify for and are only reserved for people with excellent credit.
Using a credit card to pay off an auto loan is a viable option, but it’s important to weigh your options very carefully. There are pros and cons to using a credit card for an auto loan. It all comes down to your specific situation and what works best for you. If you’re a savvy borrower and have a stellar credit score, then this is a great way to save money on your auto loan. However, if you’re not in a position to make your payments on time, then it may be better to pay your loan off with a traditional auto loan.