Most people are used to using a credit card for everyday purchases and even some bills. But using a credit card to make car payments is a little trickier. While some lenders accept credit card payments for monthly car loans, not every loan company does.
Before making your car payment with your credit card, it’s important to understand the risks and potential pitfalls. For example, the lender may charge a credit card transaction fee, which ultimately increases the amount of money you pay for the loan.
In this guide, we’ll explain the pros and cons of putting your auto loan payment on your credit card, and suggest some alternative ways to make your payments.
Benefits of making a car payment with a credit card
If your lender accepts credit cards, there may be some advantages to using this method of payment. Here are some of the potential benefits of using a credit card to pay off your car loan.
Pay off the loan balance over a longer period of time
Using a credit card for your loan payments can indirectly lower the amount of money you have to spend at one time. While banks require you to make car payments in full each month, credit card issuers allow you to pay only a portion of the total balance.
For example, if you charge your $500 monthly car payment to a credit card, you may only have to pay 10 percent or $50 this month, giving you a break by offering more flexibility.
Save on interest with a 0 percent APR credit card
If you use a credit card with 0 percent APR to finance your monthly auto loan payments, you could end up financing your car purchase for next to nothing.
You only need to pay a transfer fee, which is a fraction of the total cost you will face over the life of your car loan. Transferring an automatic loan balance to a new credit card with a 0 percent APR promotional period can also help you save.
Earn credit card points and rewards
If you use the right rewards credit card to pay off your car loan, you can earn an enormous number of points. Once you have enough points, you can often convert the rewards into cash back, airline points and other perks.
However, before you start using your credit card to pay off your car loan, check with your credit card issuer that this type of charge is eligible for rewards.
Disadvantages of paying a car loan with a credit card
Before you decide to use your credit card to pay your car payment, it’s important to understand the disadvantages. Here are some things to keep in mind when considering paying off your car loan with a credit card.
Potential for excessive debt
When paying off a vehicle, the last thing you want is to find yourself in a challenging financial situation. When you use your credit card to make loan payments, it’s possible to build up a large amount of debt, especially if you can’t afford to pay the balance in full each billing cycle. Avoid putting your auto loan payment on a credit card unless you can afford to pay it off each month.
Decrease in your credit score
Your credit rating is partially dependent on your credit utilization ratio, which is the amount of available credit you’ve used. When you exceed 30 percent of your credit card limit, your score takes a hit.
If you consistently use a credit card to pay your car loan, be careful not to exceed that 30 percent threshold. If you do, you will likely lose points on your credit score, which can increase your credit card interest rate.
Ways to make car payments with a credit card
If your lender doesn’t accept traditional credit card payments for your car loan, there are a few ways you may be able to work around their payment policy. Here are some ways you can use a credit card to pay your car payment when your lender doesn’t accept card payments.
To get a cash advance, you need to find an ATM or bank teller that works with your credit card issuer. Then you’ll withdraw funds from your credit card’s available cash advance limit (keep in mind that it’s likely less than your overall credit limit).
Next, you’ll deposit the money into whatever bank account you normally use to pay your bills. The cash advance amount will appear in your available cash balance so you can make your payment as usual. You can also use the funds to purchase a money order if you would rather mail certified funds to your lender for the loan payment.
When you get a cash advance, the bank will charge a fee based on the amount of money you withdraw. That transaction may incur higher interest charges than other purchases on your credit card. You also don’t get a grace period with a cash advance, so interest starts accruing right away.
Another way to pay off your car loan is to use a balance transfer credit card. If you have a high enough credit limit, you can transfer your entire auto loan balance to a credit card. However, most credit card companies charge a 3 percent balance transfer fee (or a flat rate).
If you can take advantage of a no-interest promotional period, you may be able to pay off your car loan interest-free with your credit card. However, you must ensure that the balance is paid in full before the offer expires to reap the rewards.
Some credit card companies allow you to make loan payments with convenience checks. A convenience check is just like a traditional check, but the money comes from your available credit balance, not your cash reserves.
There are two ways you can make your monthly car payment with a convenience check. You make the check payable to yourself, deposit it into your checking account, and then make your car payment as you normally do. Another option is to make the check out to your lender, put it in an envelope and mail your payment.
Other car payment options with a credit card
Many lenders do not accept credit card payments due to the high transaction fees. If your lender doesn’t take card payments, ask if they can accept payment through a third-party credit card processor, such as one of the following companies.
Plastiq is a payment platform that allows you to pay merchants with your credit card. After signing up, you can add your credit card to your account and then set up your car lender as a payee. Even if your borrower is not a Plastiq member, he can still receive car payments through this service. Set the payment day and how you want Plastiq to send the money, either by:
- Account pay transfer
- ACH transfer
- Electronic remittance
While Plastiq’s fees vary depending on your payment method, you can expect to shell out 2.85 percent or more for most transactions. In addition to these fees, credit card issuers may charge cash advance fees, and you cannot use an American Express card to make auto loan payments through Plastiq.
PayPal is one of the most famous payment platforms. If your auto lender accepts automatic loan payments through PayPal, you can set your credit card as a funding source before completing the transaction. PayPal doesn’t charge any extra fees to make a commercial transaction, so it won’t cost you more than it would to send money to your friends.
Cash App is another option you can use to pay your loan with a credit card. It’s more versatile than PayPal because your lender doesn’t need to work with Cash App to accept payments.
However, it is also more expensive. You may pay a credit card payment fee of up to 3 percent when you use Cash App for loan payments.
Should you use a credit card for automatic loan payments?
For most people, it’s best not to use a credit card to pay off your car loan. Unless you have a high credit limit and can afford to pay off the balance in full each month, consider your credit card as a last resort option to make your monthly payment.
While you may be able to save interest, there are quite significant risks if you still have a balance when the promotional period expires.
There are many other ways to finance your car loan that are less risky than using a credit card. Before choosing this option, weigh the pros and cons, and crunch the numbers to find out if using a credit card can actually help you save money.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with over three years of experience covering personal finance and insurance. She has extensive knowledge of various lines of insurance, including auto insurance and property insurance. Her byline has appeared in dozens of online finance publications, such as The Balance, Investopedia, Reviews.com, Forbes and Bankrate.