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Which payment method is best for buying a car?
There are a number of different ways to finance buying a new or used car, including the following:
- Use your savings
- Salary sacrifice (novated lease agreement)
- Apply for a car loan
- Apply for a personal loan
- Use your credit card
- Redraw on your home loan (sometimes called a Chattel Mortgage)
- Hire purchase
Now, you want to make sure you pay the least amount possible in interest. Obviously, financing a car through a loan or line of credit will involve paying interest, while savings does not. In the past, credit cards did not have the Low Rate or Balance Transfer offers that they do now, meaning that these days buying a car with a credit card might actually be a valid option for some.
Your choice of payment method will also depend on your expected timeframe for paying for your car. If you use savings, you may have to save up – and how long that will that depends 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.
Meanwhile, if you use a loan you have a set repayment timeframe. And if you use a credit card or redraw the amount off your home loan, you have to be diligent about repaying the debt quickly to avoid paying more in interest than you have to.
If you choose to use savings or salary sacrificing, reach your goal faster by checking out our Budgeting & Saving Tips and comparing savings accounts on our website:
We’ve written before about using car loans versus personal loans to buy a car, and the pros and cons of car loans – but what about buying a car with a credit card?
Can you buy a car with a credit card?
Yes. If your credit limit is high enough for the price of the car you want to buy, you can buy a car with a credit card.
There are several situations in which you may consider using your credit card to buy a car, such as the following:
- The price of the car is less than the usual $5,000 minimum that applies to car loans.
- You have not been successful in applying for a car loan.
- 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 the credit card.
- You know that you can afford to pay off the car quickly during the low introductory interest rate period, which is a much lower interest rate than you would get on a loan.
- Your current car has died completely and you need a way to get around. You may prefer to buy a bomb to get around in while saving up towards a better car, or you may decide to buy a better car now and pay it off as quickly as you can.
- You would receive a giant pile of 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.
If you decide to use a credit card to buy a car, be sure to give your bank a call beforehand. Large purchases are often flagged as potentially fraudulent transactions, but you can avoid this by letting them know ahead of time that you expect to put a certain amount on your card within a certain timeframe.
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:
You can calculate what kind of monthly repayments you could afford using our Car Loan Calculator:
Whether you should buy a car with a credit card is another matter entirely…
Should you buy a car with a credit card?
It depends on your circumstances. Buying a car with a credit card has its pros and cons, some of which are outlined below.
Possible benefits of buying a car with a credit card
Unlike applying for a new 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. Personal loans on our Canstar View database at the time of writing range from Instant Approval up to 48 hours (2 days) for a loan application to be approved or rejected.
Low Rate options
You can minimise the interest you pay on the car by using a credit card with a low introductory interest rate, where the credit card has a low or 0% interest rate for the first few months. Usually, introductory interest offers apply for the first 6-24 months. You will definitely want to repay the car debt within that introductory period, however, as the revert rate that applies after this introductory period can be much higher than normal interest rates.
You can also phone your lender and ask for a temporary reduction in your usual interest rates when putting an unusually large purchase on your credit card – such as a $20,000 car, for example. Many lenders allow this for those who ask, and it saves you from having to open a separate Low Rate card if you didn’t have one already.
Buying a car with a credit card has the advantage of having potentially a lower interest rate and fewer fees than most car loans and personal loans. Of course, that is only true if you choose the right card type for the job, which is most likely a Low Rate Card or Balance Transfer.
Another benefit of buying a car with a credit card is that you can earn rewards. And since buying a car is typically quite a large transaction, you would earn a lot of points in one go by paying with your card. Naturally, be sure to check that there is no capping on how many points you can earn in one month, and no expiry for redeeming those points.
If you use a credit card to buy a car and fall behind on your payments, you will accrue extra interest and penalty fees but at least the car won’t be repossessed (unlike with a car loan). Unless you have a secured credit card guaranteed by your car as security, that is.
Disadvantages of buying a car with a credit card
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, you are not allowed to put an amount on your balance transfer credit card that is 90% or more of your credit limit on that card. So you may not even be able to move your whole car debt onto a balance transfer.
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 (e.g. a $30,000 car debt), this becomes even trickier.
Finally, every time you apply for a balance transfer, this application shows up on your credit report and negatively affects your credit rating. This makes it harder to be approved for future balance transfers, credit cards, or loans.
If you were previously using your credit card as a cash flow tool, then putting such a large purchase 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 $20,000 doesn’t leave you with much wriggle room.
Miss 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 that card.
Many car dealers will add a credit card surcharge to your bill when you buy a car using a credit card rather than savings or a loan. Australian laws have changed recently to stop merchants charging excessive credit card surcharges, but even a “reasonable” credit card surcharge can add up to you a lot. If your car cost $15,000, and the surcharge is just 1.5%, you can expect to pay $225 just for paying by card.
We mentioned above that when the introductory period ends on a Low Rate or Balance Transfer credit card, the revert rate that applies is the cash advance rate. Cash advance rates are much higher than the average interest rate on credit cards (20% compared to 14%).
Requires budgeting willpower
Many people fall into the “minimum repayment” trap when it comes to credit cards. They don’t realise that the minimum required repayment is usually no more than 2% to 3% of their card balance. If you only make the minimum repayments, there is no way you could repay your full car debt before the low introductory interest rate disappears.
If you think you may not have the willpower to set your own budget and pay more than just the minimum repayments each month, you may be better off using one of the other payment methods for buying a car that we 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.
Credit cards charge an annual fee. Factor this into your calculations when deciding whether it would be cheaper to buy a card with a credit card, a loan, or savings.
Case Study: Credit Card vs other methods
Benjamin needs to buy a car, and expects to take about 24 months to pay it off at his current level of income and expenses. Good old Ben likes the look of the Mitsubishi Mirage, which won first place in Canstar Blue’s Australia-wide Customer Satisfaction Award for Sedans.
A 2016 Mirage model will cost him about $13,990 for a 1.2 litre, 3-cylinder engine (CarAdvice.com.au). Ben has $1,000 in savings (apart from his emergency savings fund, which he doesn’t want to touch), so he will need to spend $13,000 via another method or continue saving up.
In the following case study, we examine how Benjamin could pay for the car in a few different ways, assuming he can put about $500/month towards savings or the debt. We have used the average interest rate for products we research and rate, to determine how much each method could cost him in the long run.
Ben uses savings
If Ben has another means of transport and is able to continue saving up, then whether or not he reaches the goal of a new car in 2 years really depends on how much he puts in. If he can afford to save about $500/month towards the car, he will be successful – but if he is less disciplined about saving, he will not reach his goal within the 2-year timeframe.
|Online Bonus Savings Account|
|Interest Rate||3.20% p.a.|
|Monthly Contribution to Savings||$500/month|
|Total Interest Received||$441|
|Total Saved in 24 months||$13,441|
|Smaller Monthly Contribution||$300/month|
|Total Interest Received||$291|
|Total Saved in 24 months||$8,491|
|Source: Canstar Savings Plan Calculator
Average interest rates for online bonus savings accounts are current as at 13 December 2016.
Ben uses a car loan
As you can see, if Ben gives himself a 2-year (24-month) timeframe to pay off a car loan, he will pay about $1,440 in interest – and the monthly repayments will be $602. Note that the calculation below does not take into account car loan account-keeping fees.
|Interest Rate||10.30% p.a.|
|Total Interest Paid||$1,440|
|Total Paid over 24 months||$14,440|
|Source: Canstar Car Loan Calculator
Calculation for Total Paid over 24 months does not include loan fees.
Average interest rates for car loans are current as at 8 November 2016.
Ben uses his credit card
As you can see, if Ben gives himself a 2-year (24-month) timeframe to pay the debt off his credit card, then how much he pays depends on whether or not he can get a balance transfer interest rate for the full 24 months or not. If he can get a 0% p.a. interest rate for 24 months, he will repay the debt within 24 months.
However, if he can only get a 0% p.a. interest rate for 12 months, and is unable to transfer the remaining balance onto another 0% p.a. interest rate, then he will be faced with the revert rate. The revert rate on credit cards is quite high, at 17.64% p.a. on average, and this will mean that Ben would have to pay almost triple his usual repayment each month in order to repay the debt within another the 24 months. Even if he pays off a whopping $1,500/month during the revert rate period, Ben’s $13,990 car would end up costing him $21,240.
Please note that the calculations below do not account for annual fees, as this will vary depending on Ben’s choice of credit card.
|Credit Card Option 1 – Balance Transfer for 24 months|
|Balance Transfer Interest Rate||0% p.a. for 24 months|
|Monthly Repayment (min 3% of balance + additional 1.5% of balance)||$585/month|
|Total Amount Paid||$13,000 only|
|Credit Card Option 2 – Balance Transfer for 12 months|
|Balance Transfer Interest Rate||0% p.a. for 12 months|
|Monthly Repayment (min 3% of balance + additional 1% of balance)||$520/month|
|Amount Paid over first 12 months||$6,240|
|Revert Rate||17.64% p.a.|
|Monthly Interest Charges||$1,192.46/month|
|Monthly Repayment to repay within 12 months (interest + part balance)||$1,500/month for 10 months|
|Amount Paid over second 12 months||$15,000|
|Total Amount Paid over 24 months||$21,240|
Calculations for Total Paid do not include annual fees.
Average interest rates for credit cards are current as at 13 December 2016.
This advice is general and has not taken into account your objectives, financial situation, or needs. Consider whether this advice is right for you. Consider the product disclosure statement (PDS) before making a purchase decision. See Canstar’s Financial Services and Credit Guide (FSCG) for more information.
Buying a car checklist
Regardless of whether you choose a credit card or car loan, don’t forget to check our 7-Step Car Buying Checklist before you put any money on the table!
Curious to know which car Australians are most satisfied with? Check out the Canstar Blue Motoring Awards:
If you decide to look for a car loan instead, here’s how to choose a car loan. Compare your options on our website before signing up for car finance:
Finally, don’t forget to make sure you get a good deal on your car insurance. Again, Canstar can help you there:
Learn more about Credit Cards