Buying a new car on credit card
Borrow cash at 0% Interest, for years?
Before reading this article, understand that to buy a car on credit card requires you to obtain a sufficient credit card limit with a 0% APR for a set period i.e. 18 months. You must plan ahead for the whole period to which you will be obtaining credit.
For example, if you wish to borrow £5,000 over 3 years (36 months) you will need a 0% credit card for the first 18 months (most 0% credit cards providers only allow a maximum of 18-months interest-free credit) and a balance transfer to a new card for the following 18 months. Obviously, you must transfer your balance to your new card before your interest-free credit period expires.
All understood? Okay, let’s get you borrowing for free…
The number of people buying a car using a credit card is certainly on the rise. In 2015 I sold 93 cars where individuals paid at least 50% of the total balance of the car with their credit card. One year earlier a 50% balance credit card transaction occurred just 17 times.
Using credit cards such as Master Card, MBNA or Capital One is a viable way for you to finance your next car without costing you an arm and a leg. Virgin credit cards also have some amazing deals.
Planning Ahead When Buying a Used Car with Credit
An unsecured personal bank loan can range anywhere from £500 up to £25,000. One of the attractive elements of a personal loan is consistent, structured monthly payments. You’ll know exactly how long you’re going to borrow and what it’ll cost you each month. This provides a certain security that you don’t get with credit card borrowing.
But in general, borrowing with the “cheapest credit cards” substantially undercuts even the cheapest loans on the market.
So it makes financial sense to use a competitive credit card before a loan, right?
As with all lending types, much depends on why you’re accessing a loan, and how much you need to borrow.
When a loan’s better than a credit card
One very important factor for you to consider is your credit limit. Most credit cards don’t usually lend you more than £5,000 and that’s on the basis that your credit history score is very good – at least 750 out of 999. So if you’re planning to buy a car over the value of £5,000 you’re better off looking into a bank loan, Hire Purchase (HP) or Personal Contract Hire (PCP).
If you’re planning to borrow 5k or less on credit you can access up to 21 months at 0% interest on a leading credit card. This is wonderful, but it’s only useful if you can budget to pay your credit card debt off within that 21 month period. So, you’ll need to be quite organised and “balance transfer” the debt to another interest-free credit card before the 0% interest period expires.
Buying a car on a credit card from a dealer?
Remember that this way of borrowing is only helpful if the dealership offers you the facility to pay via credit card. Some car dealerships still don’t. But, there’s still a route to using your credit card and beating the terms of a personal loan…It’s just a little more complicated to do.
You’ll need to get a specialist “money transfer credit card.” It works by transferring cash from your new interest-free card directly to your bank account. You still owe the balance to the credit card company but you can pay for the car in cash or with your debit card. Note that there’s usually a fee of around 3-4% to transfer the money from your card to your bank account so you’ll need to account for this cost.
Haggle with the car dealer for all you can
If you can pay the dealer directly by credit card you should. They will charge you around 2.5% to pay a balance of over £500 on a credit card. This is likely to be less than you’d pay via the specialist transfer credit card mentioned a moment ago.
As we’ve seen in other articles, dealers profit from a sale in a variety of ways. Finance, extended warranties and even credit card fees are all profit pots to the average savvy car dealership.
As a dealer, I’ve paid around .075% as a fee to the merchant (card machine provider) each time a customer has paid by credit card. I easily charged 2% and sometimes 3% interest to the customer when they paid for their car via credit card. So if they were paying £4500 on their credit card I may charge them 3% and make an additional £135!
But believe me, you can negotiate the rate of interest (or fee) that the dealer is charging you. Most dealerships will be paying an absolute maximum of 1% per credit card transaction. You now know that they’re making money off of your payment method. I recommend making them a reasonable offer and telling them that you know the kind of fees merchants are charging these days. Why not offer them a 1.5% fee? They make a few pounds and it saves you money too. If you are clever about it try and leverage this as a final bartering tool to get the best car deal you possibly can.
One more reason why a credit card can trump any lending method
Pay for £100+ of your car on a card and the credit card company become jointly liable with the dealer if something goes wrong with your vehicle. This gives you extra legal rights.
This isn’t the credit provider being nice. It’s a legal protection put in place so that you’re never in the position of paying off debt for something you didn’t receive or wasn’t as it should’ve been. Whether it’s a flight, kitchen, computer or a used car, pay on a credit card, store card or with store instalment credit and the credit provider’s responsible too.
This is a nice added insurance for today’s car buyers who are often worried as much about who they’re buying the car from, as the car itself.
0% Interest Credit Cards
With a little research, I’ve found the longest deal at the moment to be a card which gives you a debt of 0% for 36 months and their money transfer fee is 4%. I’ve found another card that allows a money transfer less than half that fee at just 1.94%, but you get one year less to borrow 0% i.e. 24 months.
If you are practically CERTAIN you can pay the debt off within the given period or balance transfer the debt before the 0% interest rate expires, this could be a great replacement for getting a personal or HP loan to buy your next used car on credit.
The Used Car Guy