When you're in the market for a vehicle, you'll generally be financing the purchase, but in most cases, the dealership and their lending partners will require some form of down payment. This down payment is often anywhere between 5% and 20% of the price of the vehicle chosen, and while some consumers may be able to save this amount ahead of time and show up ready to pay, others may not be able to save that much and wonder if they should put the amount on their credit card.
Putting a car down payment on a credit card is generally considered to be a less than ideal solution, and in many situations, the dealer will not want the risk involved in taking a credit card down payment. If they do, and your finances are in good shape, there can be some benefits.
Depending on the specifics of your finances, your dealer, the terms outlined by your lender, and the terms of the credit card you plan to put the down payment on, you may be able to reap significant benefits from putting your new car down payment on a credit card. These situations will depend greatly on your specific situation and will not apply to everyone. We're going to dive into the details of when it's a good idea and when it is not smart, as well as digging into the best possible way you can pay for your car.
How Much Is A Typical Down Payment?
This will hinge on the price of the car you're looking at since, just like with a mortgage, the down payment will be calculated as a percentage of the price you'll end up paying. In most cases, they can be made entirely or partially in cash and can include manufacturer rebates and incentives, as well as any trade-in value.
Generally speaking, those with better credit health will be able to work with a lender to get better terms for their financing, which often includes a lower down payment, even no down payment in some cases. Newer vehicles with higher projected resale value will also likely have more relaxed down payment requirements since those loans are less likely to be defaulted on. Older vehicles, borrowers with damaged credit, or lenders who cater to "buy here, pay here" dealers will often require higher down payments as security against potential default.
Newer vehicles will also experience a significant amount of depreciation just in the first year, losing up to a fifth of their value. Putting a more significant down payment can give you immediate protection against owing more than the car is worth. Owing more on a loan than the underlying asset is worth is referred to as being "upside-down" on the loan. Used cars lose value more slowly and can help you keep your down payment more manageable in some cases.
Can You Use A Credit Card For A Down Payment On A Car
This is going to depend nearly entirely on the dealership that you're doing business with, as well as your credit and down payment criteria. Some dealers will not take credit card down payments at all, as they carry a significant degree of risk for the dealer since credit card transactions can be disputed, made fraudulently, or quickly defaulted on.
Other dealers may accept them for any down payments, often baking in the added expense of pursuing aggressive collection if the borrower defaults. Still, other dealers may only accept credit card down payments from borrowers that have impeccable credit ratings and high-limit cards that are more difficult to obtain.
That being said, just because a dealer will take a down payment on a credit card and that technically you can use one, it doesn't necessarily make it a good idea. You will need to weigh the benefits and drawbacks of your specific set of circumstances before you'll have a clear picture of whether you should or shouldn't use your credit card for a car down payment.
Making A Down Payment With A Credit Card
There are some significant benefits to putting a down payment on a credit card, and the viability of the benefits will often still depend on whether you can pay off the down payment charge relatively quickly.
The most common situation in which a consumer would benefit from putting their down payment on a credit card is if they would accrue high rates of credit card rewards from the purchase. Many cards offer cashback bonuses, airline mile earnings, and other rewards. This can be leveraged for a particularly large benefit if you have a new card with a robust welcome bonus or even a 0% APR introductory offer, which could give you much-needed time to pay off the balance if you couldn't immediately.
Situations where this won't yield any significant benefit, and could even get the borrower into financial trouble, are many. If you have the money to pay the down payment after earning rewards, that's great, but if you don't, then you could end up paying thousands more in interest charges when you end up carrying that balance for several months. If you have a card with less than favorable interest rates, often those with previous credit damage, you could end up paying more interest charges than the amount of the down payment. Your credit limit may also be a factor in deciding if you're even able to fit the entire charge on the line of credit.
Other downsides include having to now manage multiple payments. You'll have the loan payment on your new car, but now you'll also have a monthly credit card payment as well. Depending on the monthly car payment and the credit card minimum payment requirements, this could lead to financial devastation and may lead to the borrower defaulting on one or both of the payment agreements. Don't forget, your auto loan will generally have a much lower interest rate than your credit card, so overall it's generally cheaper to finance a larger car loan than to charge a bigger down payment to need a smaller loan.
Can You Buy A Car On Your Credit Card?
Buying a car entirely on a credit card is a whole different set of potential problems and downsides, with nearly no benefits to be found. The first and most obvious challenge is having a credit card with a limit large enough to accommodate the purchase price of a vehicle unless the buyer is potentially considering a used car with a far lower cost than a new one.
The next challenge is to find a dealer that will accept the entire purchase via credit card since putting a down payment on a credit card can be relatively common, but charging the entire amount will be very rare. The biggest challenge will then be paying it off before the interest ruins you. If you already have the funds and are looking to get rewards and also plan to pay the car off in a month, that is about the only way that it might be worth it to buy a car on your credit card.
What Is The Best Way To Pay For A Car?
The best way to pay for a car, without a doubt, is to pay in cash. Now this doesn't necessarily mean you walk into the dealer with a briefcase full of dough, cashier's checks are a very common way to do this, and it may actually mean you still accept a financing offer from one of the dealer's partner lenders. Dealers are known to "bake in" various costs into the vehicle, and those costs are often increased when they know that someone is paying cash, so don't let them know right off the bat.
Go in and shop and negotiate like you normally would, under the guise of needing the vehicle financed, so that you know you're getting a price that isn't influenced by your available funds. Once you have an offer, with all the details and fine print in writing, the time has come to decide how you want to pay for the car.
You can hang on to the offer and stop by a branch of your bank, getting a cashier's check for the purchase amount. This will allow you to own your vehicle outright immediately. However, you can leverage this purchase to increase your credit as well by accepting the lending offer and opening that loan, then simply calling the lender a short while later and getting a payoff amount and paying it off. This will have the loan listed on your credit as paid in full as agreed and can give your score a little (or large) boost.
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Understanding The Pros & Cons Of Putting A Down Payment On A Credit Card
You may have the opportunity to pay your down payment with a credit card, and while it might be incredibly convenient for you, or maybe the only way that you can afford to get a vehicle now, it may not be a smart idea. Putting your down payment on a credit card comes with some significant upsides and downsides, and your financial health depends on you evaluating those benefits and drawbacks before you commit to making a credit card purchase of potentially several thousand dollars. Once you've weighed your options, it'll be time to start looking for your new car.
Keep reading:
- Missed Car Payments and Repossession
- Illegal to Use a Business Credit Card for Personal Use?
- How Does Interest Work on a Car Loan? [ANSWERED]
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.