How to buy a new car with a loan or credit card
If you’re searching for car finance deals, using a credit card might not be the first option that comes to mind. But done right, using a credit card can be the cheapest way to borrow if you’re buying a new car. However, you’ll normally need a good credit rating and a high limit. Even more importantly, check whether the car dealer you’re buying from accepts credit cards. If you don’t meet these criteria, then taking out a personal loan to buy your car could be a more suitable option.
In This Guide:
- Why use a credit car to buy a car?
- Would buying a car using a credit card be right for me?
- How to buy a car using a credit card
- Alternative ways to finance a car
Why use a credit car to buy a car?
In an ideal scenario, you would get the longest 0% credit card that you can, be it a purchase card or a money transfer card. You’d then use it to buy the car, and pay off a set amount each month, clearing your balance before your 0% interest rate expires. If you were to do this, your debt is cleared at the end of the 0% period, so you pay no interest, meaning the credit hasn’t cost you an extra penny.
Of course, for some, this isn’t a realistic option. Many dealers don’t accept credit cards, or if they do, they only allow you to pay a limited amount. This is because they get charged a 0.3% fee by their banks when you use the card, and they aren’t allowed to charge you this fee.
Your credit card provider may also limit the amount you can spend - not many will give you a limit of more than £5,000, and most have limits much lower than this. Most likely you’ll have to be looking at a used car, or a small new one, for paying on a credit card to be an option for you.
Paying with a credit card also gives your purchase stronger protection if you should have any problems with the garage or your vehicle. Under Section 75 of the Consumer Credit Act, your card provider shares responsibility with the company you paid for goods or services and can supply you with a refund. This is applicable to purchases between £100 and £30,000.
Would buying a car using a credit card be right for me?
There are some hefty benefits to purchasing a car on a credit card. For example:
- If you do it right (using 0% interest deals) you can borrow money, free from all extra charges.
- You get Section 75 protection, so that your credit card company is liable if something goes wrong.
- Many 0% cards offer rewards that you can reap.
- Credit cards are flexible, so you can make a minimum payment if you’re strapped for cash at any point.
However, there are also some disadvantages that you need to consider:
- If you don’t have good credit you might not be able to get a 0% credit card.
- You might get a card, but not with a high enough limit for you to buy the car that you want.
- If you aren’t disciplined enough to pay it off in time, your debt can become expensive as soon as the 0% period ends.
- Your car dealer might not accept credit cards or may not let you pay the full amount this way.
How to buy a car using a credit card
Using 0% rates
After securing a card with a 0% rate (for example, Tesco offer 19 months interest free on their purchase cards) you should set up a monthly direct debit. This direct debit should meet at least the minimum payment. However, for large debts like this, it’s best to work out how much you need to pay monthly in order to pay off the debt before the 0% period ends.
When working out how much to pay off monthly, divide the cost of the car by the number of months that your card has at 0%. If this turns out to be more than you can afford, then you need to look at cheaper cards, or find a way to extend your 0% period.
Money transfer cards
If your dealer doesn’t take credit cards, you could still pay at 0% interest using ‘money transfer’ cards, it’s just a bit more complicated. These cards are best suited to loans of £5,000 or less, as you won’t be able to get a credit limit much higher.
The cards work by shifting cash to buy the car from your new card to your bank account for a one-off fee, so that you owe the card provider rather than the car dealership. It’s like taking out a loan, except it’s interest-free. Once the cash is in your account, you can use it to buy your new car. The main drawback of money transfer cards is that you don’t get Section 75 protection on your purchase.
Money transfer cards are quite niche and aren’t widely available, so there aren’t many options on the market. And if you don’t make the minimum monthly repayments, you could end up with a massive interest rate of over 20%.
Alternative ways to finance a car
Using a credit card isn't always the best way to fund a car purchase. If you miss out on 0% periods, or miss a repayment, costs can quickly rack up.
Instead, you might want to think about dedicated forms of car finance, such as hire purchase (HP), or personal contract purchase (PCP). These finance plans will be specifically geared towards the purchase of a particular vehicle and this means there's less chance of your borrowing getting out of control.