Credit cards or car loans? Which one to choose?

Buying a car on a credit card may not seem the most logical choice. After all, the interest rates are very high on credit cards, often far higher than the headline rates on loans. However there are a number of other things that should be considered.

Car loans are often somewhat more expensive than their advertised headline rates, so a car buyer who has found a car and then tries to find the money to buy it can be stuck with a very expensive loan. This can be particularly true if the loan is arranged in the car salesroom, as there is usually a limited choice of lenders available.

In these circumstances the rate on a car loan can sometimes be as high as or higher than those on credit card. As the loan is secured on the car, it can be repossessed. This is not the case with a credit card, although defaulting on a credit card can be a bad idea for a number of reasons.

When paying with a credit card rather than a car loan, the buyer is negotiating from a position of strength, which can be used for haggling and driving down the price. As well, there’s an interest free grace period with credit cards. During that time, the buyer can look for a car loan or sell their old car for the best price, and use those funds to pay off the credit card balance. Having more time to shop around means a better chance of finding a more attractive loan. Introductory low interest periods are another variation of this, although these periods will only last for a few months.

Credit cards also allow for flexible repayments, which is not the case with a loan. This means that if the money can be found reasonably quickly, then the purchase can be repaid early without suffering a prepayment penalty fee. The cumulative interest charges would then be lower for a credit card, rather than higher.

Cash back and rewards credit cards, which offer points for each dollar spent, are another good reason to buy a car with a credit card. This will only work if there are either savings for the purchase, or the intention to get a new loan quickly or sell the old car. Otherwise the rewards or cash back may be significant, but not as significant as the interest.