Transfer car loan to a low-rate credit card? Yes, but carefully

Question for the expert

Dear New Frugal You,
I owe $4,100 on my car. Would it be a good thing for me to move the balance to a 0 percent credit card? -- Ruth


Answer for the expert

Dear Ruth,
Transferring a car loan to a 0 percent interest credit card seems like it should be a no-brainer. But it's not. In fact, there are some major potholes that you'll need to avoid. If you should happen to hit one of them you could cause a financial blowout.

The first thing to check, Ruth, is whether your auto loan will allow you to prepay the principal. Not all do; some have prepayment penalties.

For instance, suppose that your $4,100 balance is comprised of 12 monthly payments of $341.67 each.

Some loans will require you to repay $4,100 to close out the car loan. Whether you pay it monthly per the agreement or in one lump sum today makes no difference. If that's the case, there's no advantage to paying it early. You'd just be prepaying the interest that you are being charged, not reducing the amount of interest.

Other car loans do allow you to pay the principal owed early. You need that to gain any advantage by reducing the interest rate.

It's easy to tell which type of loan you have. Call the lender and ask them for the "payout" amount. Then compare that number to the total of all the payments that you have left. If the payout is lower than the totaled payments, you've avoided the first pothole. On the other hand, if they're the same you can forget about moving the balance.

The next potential pothole revolves arounnd what the credit card offer actually means when it says "0 percent financing." The fine print and fees will determine whether it's really a good deal.

First, there are fees involved in transferring a balance. Balance transfer fees used to be limited to 1 percent or 2 percent of the amount transferred, and capped at a low level -- $50 or $75 were typical caps. Now, in general, the sky's the limit for these fees.

Then there is the duration of the 0 percent offer. For instance, you could be charged 0 percent APR for new purchases made for the first six months. Or you could be charged 0 percent for 18 months on balances transferred to the card.

Next, see if transferring the loan will be considered a balance transfer at all. It could be defined as a cash advance, instead -- and cash advances have their own rules. Generally, the APR for cash advances is more expensive -- often 20 percent or more. So check the fine print to see what the cash advance rate is. While you're reading, see if there are any associated fees.

If the card does charge 0 percent interest, with acceptable fees, you still have a few things to consider before closing out your auto loan.

One danger is that the interest rate on the car note is fixed. The interest rate on your credit card will likely be a variable rate. As the economy improves, expect the rate to rise. In addition, if you fail to make the minimum payment, you could be facing a higher penalty interest rate.

The Credit CARD Act of 2009 allows penalty rates to be charged for a minimum of six months, and the rates are often 25 percent or more. So you need to be very sure that you won't have a problem making minimum payments on time.

Finally, recognize that you'll be shifting the debt from a fixed payment lasting for a specific number of months to a payment that's based on the size of the account balance. If you only pay the minimum on the credit card each month, it'll take years to finish paying for your car.

So should you move your auto loan to a lower interest rate credit card? If you can avoid all the potholes then, yes, the lower rate will save you some money.

But walk through the entire process on paper before you transfer any money. Remember that roadside assistance for your finances can be very expensive!

See related: Guide to the Credit CARD Act of 2009, 5 new rules in the balance transfer game


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Updated: 12-11-2018