When buying a car, you have a range of payment options, including a traditional auto loan, leasing, paying cash, and more. Some buyers may come up short on cash and prefer not to get an auto loan, and they often wonder if they can buy a car with a credit card.
Below, we'll tackle the ins and outs of buying a car with a credit card, as there are pros and cons to doing so. We also get into why some dealerships don't accept credit cards as payment and alternative financing methods.
Can You Use a Credit Card to Purchase a Car?
We can answer this two ways. First, yes, you can use a credit card to buy a car in a legal sense. No laws prevent this, though it may not make financial sense in most cases. We'll get to that later.
That said, not all dealerships are OK with accepting credit cards for cars, so you'll want to check with the dealership you're shopping with to see if it will accept your plastic.
Pros of Buying a Car With a Credit Card
Why would anyone use a credit card on a large purchase, such as buying a new or used car? There are a few pros to pulling out the plastic for a purchase of this size.
Rewards Points
Many credit cards offer reward points for using them, and on a big purchase like a car, these points can quickly add up to big payoffs. For example, some rewards credit cards offer 1% cash back on all purchases. If you buy a $15,000 car, that's $150 in cash back.
If you're really fortunate, you may also be eligible for sign-up bonus points that can lead to even more rewards. For example, if your credit card has an introductory 4% cash back bonus, that same $15,000 car could earn you $600 in cash back.
Watch out for the fine print, though. Many of these bonus offers have caps limiting the amount of cash back you can get.
0% Interest Offers
Some credit cards also offer 0% intro APR. These promotions can sometimes last as long as 18 months.
If you purchase a $15,000 car with a 0% interest credit card with an 18-month promotional period, you could pay off the balance in 18 months by paying $833.33 per month and pay no interest. That's a pretty steep monthly payment, but the no-interest aspect makes it a worthwhile consideration if you can afford it.
You can also stretch out the 0% interest by transferring any remaining balance at the end of the 0% term to a new 0% APR credit card. So, if you can get a second credit card with an 18-month 0% APR balance transfer promotion, you'd get a total of 36 months without interest.
Keep in mind, though, these balance transfer credit cards often charge a one-time transfer fee of 3 to 5%. That fee would still be dramatically lower than interest charges, but it's something to consider.
Cash Flow Management
In some cases, people use credit cards simply to manage their cash flow. So, if you don't want to carry around $15,000 in cash for a car, you can use a credit card, then pay off the balance online.
Cons of Buying a Car With a Credit Card
While the pros of buying a car with a credit card are enticing, there are plenty of cons to consider too.
Purchase Limits
A large hangup with using a credit card to buy a car is the purchase limit a credit card company places on your card. While you may have a $20,000 credit limit, the credit card company may limit you to $5,000 in one transaction.
In some cases, you can call the credit card issuer to get this limit temporarily lifted, but not all companies offer this. Plus, those that do may balk at a $15,000 or $20,000 purchase limit.
This means you may have to make multiple transactions to put the entire purchase on your card.
High Interest Rates
Unless you have the aforementioned 0% interest rate, you're stuck with standard credit card rates. On average, credit cards in Canada charge 19% APR, adding up to some significant fees.
For example, if you charged a $15,000 car to a 19% credit card with a 4% minimum payment, your minimum credit card payments would be $600 per month for 182 months. During that term, you'd also pay nearly $9,700 in credit card interest, according to Bankrate's calculator.
If you took out a 60-month auto loan for the same car at 5.5% interest, you'd pay just $287 per month and $2,191 in interest.
Credit Limits
Credit cards also come with credit limits, and to get the high credit limit you need to purchase that $15,000 vehicle, you must have good credit. You can't get a high enough credit limit to put the car's purchase price on a credit card without good credit.
Annual Fees
Credit cards have plenty of fees, but a common one you'll encounter is an annual fee. Some credit cards charge this yearly fee, typically between $99 and $150, just for holding the card.
In some cases, these fees can get downright outrageous. Some perk-filled cards charge up to $699 per year.
Credit Score Impact
Credit card usage can have a significant impact on your credit score. In fact, your credit utilization ratio -- your combined credit card balances as a percentage of your combined credit limits -- accounts for 30% of your FICO credit score.
An ideal credit utilization ratio is under 30%. However, if you charge a $15,000 vehicle to your credit card, you will likely exceed this percentage, which can lower your credit score.
Why Some Car Dealerships Don't Accept Credit Cards
Most car dealerships and retailers don't accept credit cards for car purchases. There are several reasons they don't accept credit cards.
Fiscal Responsibility
Except in rare cases of 0% interest, it's simply not a responsible financial move to put a car on a credit card. To prevent putting their customers in this tricky financial situation, many car dealers prefer not to accept credit cards.
Credit Card Processing Fees
Credit cards aren't free for merchants, as they are charged relatively steep processing fees. These fees are a percentage of the transaction, such as 1.75% or 2.25%. On top of this percentage, there may also be a per-transaction fee — generally 25 cents, or so.
So, if a dealership accepts a credit card payment for a $15,000 car and gets charged a 1.75% fee, it loses $262.50 in processing fees.
Transaction Limitations
As mentioned above, credit cards often limit the transaction amount, which can create headaches for dealerships that must run multiple transactions to complete the sale.
Better Options Available
Car dealerships have access to many lending sources, so they don’t need to accept credit cards. Plus, auto loans -- even those with relatively high interest rates -- have far lower interest rates than credit cards.
With these options at the fingertips of a dealership's finance department, there's simply no reason for a dealer to take credit cards.
Alternatives to Using a Credit Card to Buy a Car
A credit card is usually not your best bet for financing a car, even if the dealership accepts them as payment. Instead, there are two common options for financing a vehicle.
Auto Loan
The most common way to finance a car is with an auto loan. Traditionally, these loans require a down payment, but you can sometimes find lenders willing to approve an auto loan without one.
An auto loan will generally have a low interest rate relative to other financing options because it's a secured loan. This means there is an asset -- the vehicle in this case -- securing the loan. If you default on the loan, the lender can repossess the vehicle and sell it to recoup a portion of its losses.
You can secure an auto loan on your own through various lenders, including online lenders, banks, and credit unions. Alternatively, the car dealership you're working with can secure a loan for you.
Personal Loan
A personal loan is a lot like an auto loan, except that it's not secured. So, if you default on the loan, the lender can put a negative mark on your credit report and potentially sue you to recoup its losses.
Because the loan is unsecured, the lender is taking more of a risk, so it will typically have a higher interest rate than a secured car loan.
Get Prequalified for an Auto Loan at Clutch
At Clutch, Canada's first 100% online car-buying experience, we have a collection of lenders ready to approve you for a great auto loan with a low interest rate. You can get pre-qualified for a car loan online in just two minutes, with no impact on your credit score.
After you get pre-qualified, check out our inventory of quality pre-owned vehicles. All our vehicles pass a 210-point inspection to ensure they're in top shape. Then we add a 90-day/6,000-km warranty so you're covered if something happens.
On top of that, you get a 10-day test-own period. If you don't love your Clutch vehicle within the first 10 days, return it for a full refund or exchange it for another vehicle.
