Weigh the costs: Should you transfer a car loan to a credit card?

It makes financial sense to seek the lowest possible interest rate when borrowing, doesn’t it? You might be tempted to transfer a car loan to a credit card if you get a zero percent introductory APR for one. top rewards credit card.

If you qualify, you’ll get a lower interest rate, plus rewards you can redeem for a dream vacation, cash back, or even statement credit.

But is transferring a car loan to a credit card a wise choice? The answer depends on several factors – starting with how you initiate the transfer.

How to transfer an auto loan to a credit card

If you can transfer your car loan to a credit card and then pay it off in full, you’ll get the introductory APR with no balance transfer fees.

But some loan issuers only allow payments by check, cash, ACH direct deposit, or money order. In this case, you can use the balance transfer checks that came with your new credit card.

You can also make a balance transfer directly from your auto loan company to your credit card issuer. You will need to provide your issuer with your loan account number, the address you would send payments to, and the name of the loan company. If you’re used to making payments online, it’s a good idea to call your credit provider to confirm this information.

When you use a balance transfer check or initiate the transfer through your credit card issuer, you may pay a balance transfer fee.

Before making the transfer, get answers to these questions:

• Will the creditor who holds your car loan allow you to use a credit card to pay off the loan balance?
• If you can’t use your credit card, can you use a balance transfer check to pay off the balance?
• Are there penalties for early repayment of the car loan?
• How much will you pay in balance transfer fees?
• How long does the intro APR last?

How to calculate the credit card interest rate

Before deciding to transfer your car loan to a credit card, calculate the amount of your new payments.

To calculate your monthly payments at zero percent interest, you simply divide the amount remaining on your loan with the terms of your introductory APR offer. If you have to pay a balance transfer fee, add it to the loan amount.

If you owe $ 5,000 on your car, with a 3% balance transfer fee, add $ 150 to the $ 5,000. Then divide $ 5,150 by 18 months, for example, if those are the terms of your introductory APR. You would pay $ 287 per month, which is probably lower than any car loan that doesn’t have a zero percent APR.

If you intend to own your car for several years, extend your loan by nine months to free up working capital to pay off higher interest debt, open a high interest savings account, or even pay off expenses. urgency may be a wise choice.

The impact on your credit score

Your credit score could suffer if you swap a secured installment loan for unsecured revolving credit. If you don’t have other installment loans in your profile, you are reducing your credit diversity. And if putting your vehicle loan balance on your card brings you closer to your credit limit, you will also lower your credit score due to high credit usage.

These are important factors that make up your credit scoreSo, if you are looking to secure a mortgage or other car loan in the next year or so, transferring your car loan may not be a wise financial choice.

If you already have another installment loan in your credit profile and the balance transfer does not approach 30% of the available credit on your card, the effect on your credit score will be minimal and you can continue with the transfer. .

If not, you may want to consider other options, such as refinancing your auto loan.

Getting a car loan vs. getting a credit card

If your credit is poor to average, it’s easier to get a car loan than a credit card. Car dealers often make deals with banks to extend credit to customers with a credit score of 640 or less. Even if you’ve declared bankruptcy, you can find a car loan – but the interest rates will be high. .

Likewise, you can get a guaranteed credit card with a low credit score. But the best zero percent interest APR Rewards credit card the offers are generally extended to those with a credit score of 720 and above.

If your credit score was below 720 when you bought your vehicle, but you have since qualified for a zero percent APR credit card, your payments will be lower than your car loan for the duration of the loan. zero percent bid. You will also save on interest charges.

Pros and Cons of Transferring a High Interest Car Loan to a Low Interest Credit Card

Benefits

• You could save hundreds of dollars in interest over the life of the loan.

• You can reduce your monthly payments.

• You can earn credit card rewards with the new charge or balance transfer.

• The loan company will release the lien on your car and sign the title for you.

The inconvenients

• Your credit score may drop due to increased revolving debt and an increase in your credit utilization rate.

• If you miss a payment on the credit card, your APR could skyrocket.

• If you can’t pay off the balance transfer or new fees during the introductory period, your interest rate may be higher than it was on your vehicle loan.

At the end of the line

If you choose to transfer your car loan to a credit card with a low introductory interest rate, make sure you have a good understanding of your credit card company’s policy to this effect, as well as the requirements. to get the introductory rate without penalty. .

About Franklin Bailey

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