Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly “The Credit Guy” column, answering reader questions about credit counseling and debt issues.
Dear Credit Guy,
I was thinking about buying the Acura TL next December with a credit card. Do you think that it would be a good idea for me financially? — Tim
It is really hard for me to answer your question since I do not know any of the details of your personal financial situation. I’d like you to answer the following questions:
- Can you afford and do you plan to make a down payment on the Acura? Without a reasonable down payment, you will be upside down (owe more on the loan than the car is worth) in your loan when you drive off the lot.
- Can you afford to make the monthly payment on the car for a term of five years or less, preferably four years or less?
- Can you afford to insure the Acura TL with comprehensive coverage, not just liability? If you bought with a credit card you could possibly avoid mandatory comprehensive coverage, but it doesn’t make sense to do so with this type of car.
- Do you have at least three months of living expenses in a savings or rainy day account?
If you answered yes to all of the questions above, then you have my blessing to purchase the car. One last thing I’d like you to consider before you buy: If you were to lose your job or take a significant decrease in your monthly income, would you immediately be in financial hardship? If so, you might want to consider purchasing a car less expensive than the $38,000-plus Acura TL.
Now, on to how you will finance the purchase. I’m not sure what the appeal is for purchasing using a credit card. But, let me outline for you how the financing of the car would work using a credit card and a traditional car loan.
Purchasing the car with a credit card may provide a low interest rate, as low as 0 percent, for a certain period (the so-called “teaser” or introductory rate), than what you would pay with a traditional loan. My caution to you is that many credit card agreements allow the card issuer to raise the interest rate at any time for any reason, regardless of whether you pay on time or not. Make sure you understand the terms of the card agreement and have read the fine print before moving forward.
A credit card would most likely allow you to make a lower payment each month than a traditional loan. Another caution: The longer you take to pay off the car, the more upside down you will be if you need to sell the car for any reason. Keep that in mind if you are choosing to use a credit card because of the lower monthly payment.
While your credit card may provide you with some type of cash reward or other points reward system if you use it to purchase the car, you need to weigh the benefits of the rewards against the possible negatives of choosing this type of financing.
A credit card is not the same as cash in the eyes of the dealership. It may be that you were given one price for “cash” and another price for obtaining financing. Using your credit card will not get you the cash price.
A traditional loan will provide a fixed interest rate and a regular monthly payment for the length of the loan. In general, the lender cannot change the terms of the loan unless you default. Even if you pay more in interest charges than with your credit card, you may come out ahead using a traditional loan given that the credit card issuer may be able to raise your interest rate due to terms in the cardholder agreement.
Take care of your credit!
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