Using a credit card to purchase a car can be a tempting way to earn rewards, but it’s crucial to weigh the pros and cons before making this significant financial decision. While dealerships often accept credit cards for booking amounts, full payments are usually limited due to transaction fees. This guide will walk you through the key factors to consider when contemplating buying a car with a credit card.
Can you actually buy a car 100% on a credit card?
The allure of buying an entire car with a credit card to accumulate reward points might seem appealing, but the reality is more complex. Most car dealerships do accept credit cards for paying the booking amount, which typically ranges from 5-10% of the car’s value. For example, if you’re purchasing a car worth ₹10 lakhs, the booking amount could be around ₹50,000 to ₹1 lakh. Premium dealerships like VW and Skoda even allow transactions up to ₹1 lakh on a credit or debit card without any issues. In some cases, especially for high-end vehicles, this amount can go as high as ₹3-5 lakhs.
However, when it comes to paying the remaining balance of the car’s price, most dealerships are reluctant to accept full payment via credit card. This is because they incur a transaction fee of around 1.75% on the charged amount, cutting into their profit margin. For American Express cards, the fee can escalate to 2.5% along with taxes, making it a substantial loss for dealerships.
What are your options?
If you’re determined to use your credit card for the purchase, there are a few options to explore:
Stretch the booking amount: Negotiate with the dealer to allow a larger portion of the payment to be charged to your card, especially for the booking amount.
Bargain on transaction fees: Some dealerships might agree to split or absorb the transaction fee, especially if you’re using a premium credit card with significant benefits.
Absorb the transaction fee: If you possess a high-end card like Visa Infinite or American Express with attractive rewards, the benefits earned could offset the transaction fees. However, this is only advisable if you have a high credit limit, as large transactions can impact your credit utilization ratio.
Things to consider before buying a car through a credit card
Before making a purchase, consider the following factors:
Merchant fees: Inquire whether the dealership charges an additional fee for credit card payments, as many dealerships impose a surcharge to cover processing costs, ranging from 1-2%.
Reward points and benefits: Understand your credit card’s rewards structure to calculate potential benefits, particularly for large purchases like a car.
Credit limit and utilization: Ensure your credit limit is sufficient to cover the car’s cost, as large transactions can affect your credit score. Consider requesting a credit limit increase or spreading payments across multiple months.
Interest rates and repayment terms: Credit cards typically have high-interest rates, so evaluate the total cost of the car after factoring in interest charges. Repay the balance on time to avoid accumulating excessive interest.
Merchant category codes: Some cards offer bonus rewards for specific spending categories, so knowing the MCC can help maximize rewards. Ensure the merchant’s MCC aligns with your card’s bonus category to maximize benefits.
In conclusion,
Using a credit card to buy a car can be rewarding, but it’s vital to assess all factors before proceeding. Consider merchant fees, credit limit, interest rates, and repayment ability to make an informed decision. Compare alternative financing options to ensure you choose the most cost-effective route. By carefully evaluating these aspects, you can leverage your credit card benefits while avoiding unnecessary financial strain.
Rohit Gyanchandani, Managing Director at Nandi Nivesh Private Limited, emphasizes the need for thorough consideration when using a credit card for car purchases. So, before swiping your card for that dream car, take a moment to reflect on these crucial factors to make a well-informed decision.
