Can you buy a car with a credit card?

Buying a car is one of the bigger purchases you’ll make, apart from buying property, so it pays to do your research into the most affordable ways to pay for it.

Typically, most Australians will save up for a car or take out a car loan. The former may require more time and effort, and the latter may incur its own fees and risks. But some Aussies may be wondering if they could put a car loan purchase on plastic.

Here is everything you need to know about potentially paying for a car with your credit card. 

Is it possible to buy a car with a credit card?

Short answer: Yes, if your credit limit and budget allow it. But is it the right financial decision to make? 

There are several things to take into consideration when it comes to using your credit card to make a potentially expensive purchase, including:

• The risk of growing debt. First and foremost, you need to consider that making an expensive purchase on a credit card that you cannot pay back right away (and that’s earning high interest) is a sure-fire way to quickly accumulate a large debt.
• The credit limit. Your credit limit may prevent you from purchasing your dream car if it’s lower than the asking price.
• Can you afford this? Maybe you have a credit limit high enough to purchase a car, but can you afford to budget for the potential repayments?

However, you may be looking at a second-hand car only worth a few grand, have been rejected for a car loan before or know that you have the funds to pay the car back immediately.

In fact, if you had the cash ready to go and wanted to purchase the car via credit card, you may be able to earn major rewards points. Plus, you have the advantage of not having to wait around for car loan pre-approval.

When might buying a car via credit card work?

There are some scenarios where buying a car via credit card may actually be a worthwhile option to consider.

1. You have the cash ready to go to pay your balance in full by the next statement period;
2. You’re a points chaser looking to earn major rewards points;
3. You don’t want to offer up your car as security on a loan;
4. You cannot get car loan approval (perhaps due to the age of the car, or your own financial situation); and/or
5. You’ve nabbed a 0 per cent interest rate period on a credit card and want to pay down your debt in this time.

The most important thing to consider is how this potential purchase may factor into your budget. As mentioned before, unless you have the cash at hand, your outstanding balance may be hit with a high interest rate immediately, causing your debt to grow. 

For this scenario to work out, one of the easiest ways to pay off your car via credit card may be to use one with a zero per cent interest introductory period. You’ll need to confirm with the card provider that a purchase this large is allowed, and factor in any fees and ongoing costs that may pop up. 

But paying off a car in an interest-free period on a credit card would, in theory, be more affordable than a car loan charging you interest – as long as you repay the balance in full in that time frame.

When might buying a car via credit card NOT work?

If you don’t have the cash ready to go for your car purchase, or if your card charges a high purchase rate, there are serious risks around using your credit card to buy a car. 

As mentioned earlier, the risk of your debt snowballing out of control is severe if you’re not able to budget for repayments. For example, a minimum credit card repayment amount is around 2 per cent of the balance. If you bought a $20,000 car on your credit card, not even factoring in interest and fees, the minimum repayment for the first statement period would be $400.

Not only will you need to budget for your repayments, it’s worth considering that the purchase rate and any ongoing fees will begin to add up. For example, that same $20,000 car purchase on a credit card charging 16 per cent interest would balloon to $57,197 if you only made minimum repayments. It would also take 42 years and 10 months to pay off (based on ASIC’s MoneySmart credit card calculator).

Further, if you do max out your credit card, not only will you be unable to use it for any other purchases until your balance is paid in full, but you may hurt your credit score. Maxing out your credit limit may negatively impact your credit history, making taking out other financial products like a home loan very difficult.

What are the pros and cons of using a credit card to buy a car?

Pros:

• No car loan pre-approval needed
• Earn major rewards points
• 0% interest introductory offers make repayments easier
• Car not used as security on loan

Cons:

• Serious risk of debt
• Interest rate surcharges
• Maxing credit card hurts credit score
• Budgeting and cash flow issues

What other car finance options do you have?

There are a range of alternative payment methods you can use to buy a car other than using your credit card, including:

• Using your savings
• A car loan
• Salary sacrificing
• Redrawing on your home loan

The best option for you will depend on your specific financial situation, savings and budget. If you’ve done the maths on your budget versus potential car repayments on a credit card, and still believe it’s the most affordable way to go about it, then this may be the right choice for you.

If you’re just uncertain about taking out a car loan, it may be worth speaking to a car loan broker. They may be able to give you financial advice around car loans that best suit your finances, as well as options that don’t involve offering up the car as security, if needs be. 

Keep in mind that there are some competitive car loans on the market. Car loan interest rates have, on average, historically been lower than an average credit card rate. A $20,000 loan with an interest rate of 5 per cent is a much more manageable debt than a credit card charging 16 per cent interest.

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