Do you love accruing credit card rewards just for buying groceries, gas and other items that you would buy anyway? Bigger purchases often mean bigger credit card rewards. Because of this it is no wonder that consumers would consider using a credit card to pay for all or a portion of a car purchase. In other cases, they might use the card because they don't have enough cash for a down payment or a good enough credit score to get a loan.
Types of Debt
There are two basic types of debt -- secured debt and unsecured debt. A home mortgage and a car loan are examples of secured debt. In these situations your home or car act as collateral in the event you do not pay the loans according to the loan terms. Credit cards and student loans are examples of unsecured debt because there is no collateral tied to these loans. No matter what type of debt you have, you are required to make payments according to the loan and credit terms.
Owning the Car Title
When you purchase a printer from the store using a credit card, you own it and do not have to worry about it being repossessed. The same thing applies to bigger purchases as well, including cars. If you purchase a car using a credit card, or a combination of cash and a credit card, you will own the title to the car. When you have a secured car loan financed by a bank, the bank holds title to the car until you have paid off the secured loan.
What Credit Card Companies Can Do
Since you own the title to the car when you purchase it with a credit card, the credit card company cannot repossess your car if you fail to make required payments. However, the credit card company can take other actions. It will likely start by charging late fees and then reporting late payments to credit bureaus, which will negatively impact your credit rating. If the debt remains in default the credit card company may also submit your account to collections in order to recover the money owed.
Benefits of Using Credit Card
If you use a credit card to pay for a car, you won't have to wait for a loan approval because you already have a credit limit available on your credit card. Some credit cards offer a zero percent introductory interest rate offer on a credit card. This can give you time to put your saved money into a short term CD to earn interest before you have to use that money to pay off the credit card. You can also earn 1 percent to 2 percent cash back or other rewards if the card you use has a rewards program.
Why Using Credit Card is Not the Best Idea
Credit card interest is usually much higher than the interest rate on an installment loan and, especially, a secured installment loan. If you can get an installment auto loan for a much lower interest rate, that's usually a better option. A credit card should be reserved for situations where you have cash available to pay off the card immediately to avoid paying interest. Also, dealers do not usually like it when consumers use credit cards to finance all or a portion of an auto purchase and may impose limits on how much can be charged to a credit card. Auto dealers, like all retailers, have to pay fees to credit card companies when customers make purchases using credit cards. In addition, auto dealers do not get a chance to earn interest on the loans they often offer to buyers.
Dawn Aldridge has worked in accounting and business since 2004. Her diverse experience includes public, small business and government accounting, as well as logistics and inventory management. She holds an MBA from the University of Illinois at Springfield.