Why Not Pay Your Auto Loan With a Credit Card?

Let's face it: An auto loan can be a burden. If you purchase a brand-new car, you can be looking at years of payments, no matter how good the terms of your loan are. Even purchasing a used car from an auto dealer can run into thousands of pounds worth of repayment. The average monthly car payment is somewhere around a fifth of the borrower's monthly income.

When faced with the reality of car loans and their terms, many borrowers are tempted to pay the balance of the car loan and get it off their shoulders. One temptation is to use a credit card to pay the car loan off to zero and completely own your car. But before you go down this route, there are a few things you should know.

First of all, stop and think about interest rates. How is the interest rate on your car loan? Chances are fairly good that it's a lower rate than you will get on most credit cards. If that's the case, there's no good reason to transfer your balance to a credit card only to be charged more in interest. Keep in mind, too, that if you fall behind on your payments, a bank or credit union that holds your car loan is going to be more understanding. You can work out payment plans and gradually get yourself back in good standing if you contact them as soon as you're in trouble. But with a credit card, the first response when your payments are late is- you guessed it- a higher interest rate. What could have been a minor setback in paying off your loan could very well turn into chaos if you've transferred the balance onto a credit card.

The same theory applies to using your credit card to make some of your monthly car payments, even if you don't pay the balance down to zero. With interest fees and, essentially, two bills for the same loan, you may be stretching your payment time out even longer than necessary.

Keep in mind as well that some lenders may even fault you if you pay your account off in one lump sum. Before you even consider paying off your loan via credit card or any other method, check the terms to make sure this prepayment penalty is not a clause.

Finally, keep in mind that credit exists for a reason. The most financially stable people use credit cards for emergency expenses such as job loss or medical emergencies. If you've used up your credit cards by paying off a car loan just to walk away with a title in your hand, you may put yourself in a very tough position down the road.