Can you buy a car with a credit card?

NICOLA FIELD
Personal Finance Writer · 30 September 2021
Buying a car with a credit card – is it possible? Is it a good idea? Canstar investigates.

Buying a car is a big financial outlay, so it’s worth checking out the different options to finance a new or used car, including:

As cars can drop in value rapidly, particularly if you are purchasing new, you may want to consider aiming to pay the least amount possible in interest. Obviously, financing a car through a loan or line of credit will involve paying interest, while using only savings does not. With some low rate credit cards on offer, buying a car with a credit card might be a valid option for some car buyers. But, of course this depends on your personal circumstances and finances. You may find it helpful to compare different options that are available to you to ensure you are getting the best deal with how you finance your car.

What are the payment methods for buying a car?

Your choice of payment method can depend on your expected timeframe for paying for your car. If you use savings, you may have to save up. How long that takes will depend on your income and your ability to budget. In the meantime, you’ll need an alternative way to get around. But once you have the cash ready, the car can be paid for in full immediately. If you choose to use savings, you may be able to reach your goal faster by checking out our budgeting and savings tips and comparing savings accounts with Canstar.

Canstar Research crunched the numbers, based on the average Australian annual income for a full-time worker, to find out an estimate of how long it might take someone to save up for a new car that costs $25,000. Their calculations found that if that person were to save 20% of their monthly income, and put it into a bonus saver account, it could potentially take them almost two years to save up the funds.

Time needed to save $25,000 for a new car

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Average annual income $90,329
Average bonus saver rate 1.06%
% of monthly income saved 20%
Time to save $25,000 1 year 10 months

Source: www.canstar.com.au – 23/09/2021. 

How we worked this out: Average annual Income based on average full-time adult ordinary time earnings per ABS Average Weekly Earnings, May 2021. Average bonus saver rate based on savings accounts with a conditional bonus rate on Canstar’s database available for a balance of $10,000, with average based on the monthly averages over the past two years. Calculations assume income tax and the Medicare Levy are applied to the average annual income and savings account interest earnings per the 2021-22 rates, and that a deposit of 20% of net monthly income is made into the savings account at the start of each month.

Meanwhile, if you use a car loan or personal loan, you have a set repayment timeframe. A secured car loan, where you use an asset (usually the car itself) as collateral, can offer a lower interest rate than an unsecured car loan. If you use a credit card or redraw the amount off your home loan, it pays to be diligent about repaying the debt quickly to avoid paying more in interest than you have to.

You can also consider a novated car lease, but keep in mind with this option that while there may be some advantages, you don’t own the car.

Canstar Research has crunched the numbers to work out an estimate, based on details of the products on our database, of what different types of finance methods may cost someone buying a $25,000 car and repaying it over five years.

Ways to purchase a new car and how much it might cost

Taking a loan of $25,000, repaid over 5 years
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Personal/Car Loan
Average rate 7.43%
Average application fee* $230
Monthly repayment $500.12
Total interest costs $5,007.05
Total interest + fees $5,237.05
Credit Card
Average rate 17.41%
Average annual fee* $125
Monthly repayment $626.84
Total interest costs $12,610.34
Total interest + fees $13,235.34
5-Star Rated Low Rate Credit Card
Average rate 9.35%
Average annual fee* $45
Monthly repayment $523.22
Total interest costs $6,392.95
Total interest + fees $6,617.95
Home Loan Redraw
Average rate 3.13%
Monthly repayment $450.66
Total interest costs $2,039.78
Commonwealth Bank Novated Lease
Fixed rate 3.84%
Document fee* $595
Monthly repayment $375.97
25% residual payment $6,250
Total costs $28,808.20
Average annual income $90,329
…net of monthly repayments $85,817.36
Difference in annual income tax $1,556.52

Source: www.canstar.com.au – 23/09/2021.

How we worked this out: Based on products on Canstar’s database available for a $25,000 loan amount and five-year loan term (where applicable). Personal/Car Loan figures based on secured personal and car loans available for the purchase of a new car. Credit Card figures based on personal, unsecured credit cards on Canstar’s database. 5-Star Rated Low Rate Credit Card based on Canstar’s Credit Card Star Ratings (September 2021). Home Loan Redraw figures based on owner-occupier variable home loans available for a loan amount of $500,000, aat 80% LVR and with principal & interest repayments, excluding introductory and first home buyer-only loans. Commonwealth Bank Novated Lease based on a quote obtained from the Commbank website on 23/09/2021. Average Annual Income based on average full-time adult ordinary time earnings per ABS Average Weekly Earnings, May 2021. Difference in income tax per 2021-22 rates plus the Medicare Levy. *Personal/Car Loan application fee and Credit Card annual fees are assumed to be paid upfront, and Novated Lease document fee assumed to be capitalised into loan amount.

Can you use your credit card to buy a car?

You should seriously consider whether or not considering using your credit card to buy a car makes good financial sense, as credit cards can have high interest rates, fees and charges that apply, and you could damage your credit rating if you don’t make regular repayments on time. Another big stumbling block around buying a car with a credit card is that you’re likely to be limited to buying through a car yard. It’s unlikely a private seller will have the facilities for you to pay using a credit card.

If you’re happy to buy from a dealer – and your credit limit is high enough for the price of the car you want to buy, you might be able to buy a car with a credit card.

There are several situations in which you could consider using your credit card to buy a car, such as:

  • you’ve been knocked back for a car loan. However, if you have a poor credit rating, it may not be a good idea to consider borrowing money on a credit card to buy a car.
  • you want to buy a car sooner – without waiting for a loan to be approved, and you have sufficient credit on your credit card to pay for a car
  • you want to split the cost of the car between multiple payment methods, such as a part-payment from your savings account and a part-payment on your credit card
  • you’ve scored a 0% or low rate credit card, and you’re confident you can pay off the car quickly to minimise interest charges
  • you can earn rewards points by putting the car purchase on your credit card – and you know that you can easily afford to repay the debt on your credit card

Before you decide how to finance your new ride, draw up a repayment plan to see whether or not you could actually afford to repay such a large debt. Our Budget Planner can help.

You can calculate what kind of monthly repayments you could afford using Canstar’s Car Loan Calculator.

Do car dealers accept credit cards?

Yes, some car dealers will let you pay for a car with a credit card, though it could mean paying a surcharge. Others may only let you pay for part of the purchase price with a credit card. This is something worth speaking to individual dealers about before you sign up to buy a car.

How much can you put on a credit card when buying a car?

How much you can put on a credit card when buying a car can vary on a dealer-by-dealer basis. Again, this is something to discuss with the dealer. Bear in mind, dealerships may push for you to take out dealer finance rather than accept payment by credit card. This way, the dealer may earn a profit on the sale of the car, plus interest on the finance deal. So depending on the price of the car, you could get knocked back for paying the full price by credit card.

One thing is more certain. If you decide to use a credit card to buy a car, be sure to give your bank a call beforehand. Large purchases can be flagged as potentially fraudulent transactions. You can avoid this by letting the card provider know ahead of time that you expect to make a substantial payment on your card within a certain timeframe.

While you may be able to buy a car with a credit card, whether you should or not is another matter entirely.

Should you buy a car with a credit card?

Although there are now some low rate credit cards available, credit cards can also have high interest rates, fees and charges, so you should seriously consider if buying a car with a credit card is a good idea for you, based on wider car finance options that may be available. Cars usually depreciate quickly, and there’s a possibility that taking out a considerable debt to buy a car with a credit card could contribute to you experiencing financial hardship. There may be several finance options to consider aside from using a credit card. If you’d like financial help, you can contact the National Debt Helpline on 1800 007 007 to speak to a financial counsellor.

Buying a car with a credit card has its pros and cons, some of which are outlined below.

What are some potential advantages to buying a car with a credit card?

Having access to a pre-approved line of credit, the availability of low rate interest repayments and being able to earn possible rewards are some potential advantages to buying a car with a credit card.

Pre-approved finance

Unlike applying for a car loan or personal loan, your credit card is a pre-approved line of credit, meaning you are able to spend up to your credit limit without checking with the lender first. This can be convenient for someone who needs a car immediately and can’t wait a few days for a loan to be approved – assuming the loan is approved at all.

Low rate and low fee options

You can minimise the interest you pay on a car by using a credit card with a low introductory interest rate. This can mean paying 0% interest or a very low rate for the first few months. You should aim to repay the car debt within that introductory period, as the revert rate that applies after this introductory period ends can be much higher. Also, it makes sense to compare the interest rate that you can get on a credit card versus the interest rate that may be available to you on a car loan or a personal loan before making a decision.

Buying a car with a credit card can have the advantages of offering a potentially lower interest rate and fewer fees than some car loans and personal loans. But this will, of course, depend on the credit card that you choose, and how this might compare to other finance options that are available to you as a borrower. Carefully considering the terms and conditions of different financial products, as well as fees, charges and interest that might apply, could be helpful in weighing up your choices.

Earn rewards

Another benefit of buying a car with a credit card is that you can potentially earn rewards. And since buying a car is typically a large transaction, you may be able to earn a lot of points in one go by paying for a large purchase with your card. Naturally, be sure to check there is no cap on how many points you can earn in one month, and no expiry for redeeming those points. Be aware too that rewards-based credit cards are likely to come with a higher interest rate and annual fee than a no-frills credit card.

If you cannot repay your credit card balance in full relatively quickly though, you might be better off with another finance option to purchase a car. Any potential benefits you might gain in rewards points could be outweighed by interest and charges.

What are some potential disadvantages of buying a car with a credit card?

There are several potential disadvantages of buying a car with a credit card, such as paying a lot of additional money in fees, charges and interest; not having a balance transfer guaranteed (if you are considering this); limiting your cash flow; paying surcharges and paying annual fees. Additionally, if you don’t make the repayments on your credit card regularly, there could be a negative impact on your credit score. It could be a wise idea to thoroughly research your options before deciding on a payment method.

High interest rate, fees and charges

Depending on the credit card you apply for and your credit score, you could find yourself in a situation repaying a credit card that has a high interest rate, fees and charges (see data, above). Taking out or using a credit card to purchase a car could be a costly option overall for car financing.

Balance transfer not guaranteed

Something worth knowing is that you shouldn’t expect to be able to buy a car using a credit card, then switch to a balance transfer when the introductory period ends on your first credit card. Balance transfers are not a guaranteed solution for two main reasons.

First, Canstar Research has found that most credit cards limit the amount that can be put onto a balance transfer to a percentage of the card’s approved credit limit. The most common maximum balance transfer amount allowed is 80% of the card limit. However, 90%, 95% and 100% limits also exist^. So you may not be able to move your whole car debt onto a balance transfer.

^Source: www.canstar.com.au – 23/09/2021. Based on personal, unsecured credit cards on Canstar’s database that offer a balance transfer, excluding interest-free cards.

Secondly, you may not be approved for a balance transfer credit card. It’s hard to know whether you will be approved for a credit card at the best of times, and when you’re talking about transferring a large debt onto the card (such as a $25,000 car debt), this can become even trickier.

Finally, every time you apply for a balance transfer, the application can show up on your credit report and may negatively affect your credit rating. This can make it harder to be approved for future balance transfers, credit cards, or other loans.

Cash flow

If you were previously using your credit card as a cash flow tool, putting a large purchase – like a car – on the card may severely restrict your ability to use the card when you need to. For example, on a card with a credit limit of $25,000, buying a car for $24,000 doesn’t leave you with much wriggle room.

Missing out on interest-free days

While you are carrying an outstanding balance on your credit card (the car debt), you will not enjoy the usual interest-free days on any other purchases you make using the card.

Surcharges

You may be required to pay a surcharge if you use certain types of credit cards and other payment methods to pay for an item that you buy. However, a limit applies to the amount that can be charged, depending on the type of card or payment method that you use. The Reserve Bank of Australia has banned “excessive payment surcharges” on credit, debt and pre-paid card payments, for:

  • Eftpos
  • Mastercard
  • Visa
  • American Express ‘companion cards’ (cards not issued by American Express, but by another financial institution)

This means that if you pay using one of the above methods, the business can only charge a surcharge that reasonably covers the cost of providing that payment method, which the RBA states is typically between 0.5% and 2%. If you were, for example, to buy a car for $15,000 and you had to pay a 2% surcharge, that could cost you an extra $300.

The ban does not apply to other cards and forms of payment, including:

  • BPAY
  • PayPal
  • Diners Club cards
  • American Express cards issued directly by American Express
  • cash
  • cheques

The business is required to let you know if there is a surcharge payable (before you pay it), according to the Australian Competition and Consumer Commission (ACCC). Contact the ACCC if you think you have been charged an excessive payment surcharge.

Revert rate

As we mentioned above, when the introductory period ends on a low rate or balance transfer credit card, the revert rate that applies can be the cash advance rate. This could potentially see you paying a far higher interest rate than you’d pay with a personal loan.

Requires budgeting willpower

It’s easy to fall into the trap of only paying the ‘minimum repayment’ for a credit card.

Canstar Research has found that credit card minimum repayments usually have both a fixed dollar amount and a percentage amount, and whichever is higher is the one that is applied each month. Most fixed minimum repayments for cards on our database are between $10 and $30, though they can range from $1 to $100. Most credit card providers set a percentage minimum repayment of 2% or 3%, though this can be up to 5%. Given that the interest rate on a credit card is likely to be a lot higher than this, sticking to the minimum repayments will tend to drag out the debt, making it harder to repay your car in full before a low introductory interest rate disappears and likely costing you more in the long run.

If you think you may not have the willpower to set your own budget and pay more than the monthly minimum, it could be a wise idea to research and consider one of the other payment methods for buying a car mentioned above. For example, saving up towards the purchase price of a car can be done at your own pace, without the pressure of paying interest. Or signing up for a loan means you don’t have to set your own budget – the lender tells you how much you need to pay each month, and at the end of the loan term your debt is guaranteed to be fully repaid.

Annual fees

Credit cards charge an annual fee. Factor this into your calculations when deciding whether it would be cheaper to buy a car with a credit card, a loan, or savings.

Cover image source: Syda Productions/Shutterstock.com | Additional sub editing: Tom Letts


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This content was reviewed by Sub Editor Jacqueline Belesky and Digital Editor Amanda Horswill as part of our fact-checking process.


Nicola is a personal finance writer with nearly two decades of industry experience. A former chartered accountant, who holds a Bachelor of Commerce and a Master of Education degree, Nicola has contributed to several popular magazines including the Au