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01/01/2008

Purchasing a Car with a Credit Card

If you are like most Americans with credit card debt, just the title of this article alone may be enough to make the little hairs on the back of your neck stand up!

Given the state of the economy these days, it may feel like there is sometimes barely enough money to cover life's basics. Nevertheless, there are things we have to buy and sometimes a new (or used) vehicle is one of them.

There are as many different opinions on purchasing a car with a credit card, as there are different vehicle makes, models and colors sitting on a lot. But deciding whether to use this option or not requires careful consideration of the pros and cons.

For purposes of this article, let's assume the following:

- the buyer cannot pay cash

- the buyer has an ample credit line

- the dealership will allow the full purchase price to be made via credit card (for a variety of reasons, some dealerships will not)

If you purchase a $25,000 vehicle with a 10% annual percentage rate (APR) for 60 months, the total financed amount would be $31,870.57, with a set monthly payment of $531.18. The loan is also secured (i.e. fail to make the payments and the vehicle will be repossessed).

Using a one-year, introductory 0% APR credit card results in varying monthly payments, starting at $750 and ending at $536.47, because the payment amount s decrease as the balance decreases (note: this assumes paying the minimum monthly amount and no additional account purchases). Also, the balance is unsecured so if you don't pay in full, late or not at all, the car is still yours. And, after the first year you would have to transfer the remaining balance to another 0% (or low interest rate) card, take out a loan or other action.

Comparing the two, after 12 months you would owe:

Financial Institution: $20,943.30

0% Credit Card: $17,346.09

Savings: $ 3,597.21

Some consumers assert other perks including earning reward points, frequent flyer miles and/or cash back incentives. For example, a 2% cash back incentive based on $25,000 yields an additional $500 savings.

Who should not purchase a car with a credit card? Anyone who has trouble with credit card debt.

The plus (and minus) credits card is that you really have "flexible" monthly payments. Yes, there is a minimum amount due. But if for some reason you are unable to pay it in full--or at all--here or there, the bank would still keep you as a customer and gladly add late fees, raise the APR (introductory rate offers can balloon up to around 14% or more for any tiny infraction of the terms!), and give you, for the most part, all the time you need to play catch up (sarcasm intended!).

The benefit, as it were, of taking out a conventional loan is a set monthly payment - period. And because the loan is secured, there is more at stake for non-payment.

So, before deciding whether or not to purchase a car with a credit card, be sure to carefully weigh the pros and cons.

Lysa Allman-Baldwin possesses over 12 years of experience as a Freelance Writer. Her feature articles covering a wide variety of topics appear regularly in several print and on-line publications.





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