Reader Question -Should I Pay Off My Car Loan With A 0% Interest Credit Card?
Got a question yesterday from one of the readers:
I currently have about $11,000 left on my car loan at around 7% interest, but was thinking of getting a 0% balance transfer and paying it off. I understand that after the 0% period ends I will have to find another card, but do you think it is worth the hassle?
That is a toughy, I gotta say. I know a lot of people would yell NO from the top of their lungs immediately, and while I do tend to agree with them, I also think there might be something to this. Let’s look at the negatives first:
1. If you miss a payment or you are late on one or two, the credit card company can eliminate that 0% interest offer and raise it to your default (or worse, their default rate) which could be anywhere from 9% – 25% or so.
2. What happens at the end of the 0% interest offer? Will you be able to find another card to get a 0% interest balance transfer from? Maybe not…they seem to be drying up pretty quick.
3. If you were planning on renting an apartment or buying a house anytime soon, a balance on a car loan is pretty much seen as OK compared to $11,000 in credit card debt. They don’t care what it was for…on your credit report it will not show a car loan and will only show the credit card debt, so it will reflect poorly on you.
Now that we got those out of the way, although I cannot condone doing so (I wouldn’t, if that helps any), there could be a positive to doing this, especially if you can make huge payments to the credit card company every month to pay off the car within the balance transfer offer time period. You could:
1. Make your payments automatically so you never miss one. (I have been paying on car loans since I was just out of college off and on, and never missed a payment…so I cannot imagine missing a payment on a credit card.)
2. Save some interest. Let’s say your car loan was initially for $25,000 and you have been making payments on it for a few years. Example: every month you send the car company $495; but only $350 is actually going towards the car…the rest is interest. At the end of 12 months, you would still owe $6,800 on the car. If you had a 0% balance transfer, all $495 would be going towards the car. So at the end of the 12 month CC offer, you would only owe $5,060, a savings of $1,740. These numbers are made up and arbitrary, so don’t count on them being exact…I don’t know your exact details.
Hmmm…Even with the savings, it is just not worth it to me. I don’t like credit card debt, plain and simple. Mortgage and car loans I am OK with, but not credit card debt. If I were you I would stick with the car loan and just send extra money in every month or, depending on the year of the vehicle, see if a credit union or local bank will refinance at a lower rate for you. Hope that helps…
Anyone else have anything to say on this? Curious if my feelings are right or I am being overly cautious here…
I am doing this. I agree that you have to be someone that ALWAYS pays your bills on time.
I also have no major purchases planned….and my credit score did take a dip…but am not in the market to buy a home…as already did 8 years ago.
Anyhow…my car was at 7.3% interest, my payments were $469 per month.
I bt to a Discover card at 0% interest for 12 months. I pay just over the minimium each month, $115, and pay the remainder to a high interest online savings account.
Im planning to pay it off (not do another balance transfer), when the 0% offer is over.
For your FICO score, they look at the types of debt you have installment debt( such as a car loan or mortgage) and revolving debt ( such as a credit card ) and they like to see both kinds of debt.
So your FICO score could take a hit due to this. Something to consider if you have no mortgage now but might be in the market for one in a few years.
I might be tempted by such an offer, but in the end I’d probably not take it.
I am currently doing the same thing with my car and a timeshare……and an online high-interest checking account to take care of the monthly minimum payments. The interest rate for my car was 8.27% and the timeshare people wanted to finance my loan for 18.73%. So, I told both places that was fine…knowing full well that I had my 0% credit cards (3 of them) to use after the paperwork was done. In fact, I paid both loans off with my 0% credit card that accumulates points towards payments on my mortgage. So far I have accumulated over 24,000 points….meaning ~$500 paid towards my mortgage.
It may take a little more effort to creatively pay for things, but definitely well worth it in the end. 🙂
An auto loan secured by an auto can, in theory, be repossesed whereas an unsecured credit card is UNSECURED, i.e. no repossesion.
Always exchange secured debt with unsecured debt and you’ll come up a winner 😉
I’ve thought about doing the same thing, but I’m a little afraid of not being able to payoff the credit card at the end of the 0% offer. Just recently I took out a 0% BT credit card for arbitrage and even that is making me a bit nervous.
I’m working hard on saving to payoff my car now, putting everything I can into a savings account that pays 5%. Once enough is in there I’ll just pay the loan off. The interest rate on the car loan is 6.25% so I’m coming out a little behind by not putting extra directly to the loan. But I use the savings account as a temporary extra emergency fund so it’s worth it to me. I think I can pay it off in a year but if I can’t I don’t want any credit card company getting my money.
I wouldn’t always exchange secured debt with unsecured. I’ll take a secured debt of 5% over an unsecured debt of 25% any day of the week.
MSMomsmoney has the right idea. Get the 0% credit card offer and put it in an online bank earning 5+%. This means you are effectively paying less than 2% on your car loan. It’s not as great as a gain as if you paid off the car completely, but you don’t run the risk of not being able to find another card or huge consequences from missing a payment.
In short if you are going to money from a credit card at 0% interest, you want to access to money that can pay it off if necessary.
But if you pay off the car with the money sitting in an interest bearing account, wouldn’t you then still (when it’s all gone) have a paid for car and credit card debt from the balance transfer?
Nice article, but I think there is a typo in point number 2, you might have typed 25000 instead of 10000. I figured that based on your calculations.
I recently transferred nearly 11000 of auto loan @8.09% to my credit card at 0%. The biggest motivating factor for me was the $100+ interest they used to charge me on every monthly payment.
But what enabled me to make the decision was that I have an emergency savings account with Amtrust with nearly 10000 in it so I can pay off the credit card debt when required.
Hope this helps anybody present in a similar situation.
-Peace
I put the remaining $12,000 from our car on our 0% card for 8 months and paid it off a month early. However, as many of you already said, you need to be very diligent with your finances. I made sure we had ample room in the budget to pay it off on time (or early), even if we were hit with an emergency.
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[…] Reader Question -Should I Pay Off My Car Loan With A 0% Interest Credit Card? Got a question yesterday from one of the readers: I currently have about $11,000 left on my car loan at around 7% interest, but was thinking of getting a 0% balance transfer and paying it off. I understand that after the 0% period ends I will have to find another…… […]
[…] Reader Question -Should I Pay Off My Car Loan With A 0% Interest Credit Card? Got a question yesterday from one of the readers: I currently have about $11,000 left on my car loan at around 7% interest, but was thinking of getting a 0% balance transfer and paying it off. I understand that after the 0% period ends I will have to find another…… […]