Weekly food shop, cinema trip, flights to somewhere sunny – almost every purchase you make can be paid on credit card. But what about high ticket items?
Well, if you’re in the habit of putting your purchases on plastic, you’ll be pleased to learn that you could buy your next car with a credit card too!
There are several reasons why we tend to reach for our cards rather than pay in cash – and it’s not always because we don’t have the money saved and ready to spend.
Managing your credit cards effectively and clearing their balances each month can help to improve your credit score, make it easier to track your spending, and reward you with things like cashback, shopping vouchers, and air miles.
So, how does it work when buying a car?
You might find that using a credit card is cheaper than other types of finance. It also offers some extra consumer protections, which we’ll explain in more detail later. But it’s not the right option for everyone.
Cars – even used models – usually cost more than the credit limit on your card so it may be impossible to put the entire balance on your card. You may also need to have a good or excellent credit score to qualify for a low interest rate and high credit limit.
That’s not all; dealerships can be another sticking point. Depending on their policies, they may or may not accept credit card payments, either at all or for part payment of your new wheels.
Got a specific question? Why not skip to a section:
- Do car dealerships accept credit cards?
- Will I get credit card protection?
- How paying for a car with a credit card works
- What are the benefits of using a credit card to buy a car?
- What are the drawbacks of using a credit card to buy a car?
- What alternatives are available?
Do car dealerships accept credit cards?
So, you’ve visited your local dealership, found your dream wheels, and you’re now ready to make it official. You reach into your wallet and go to hand over your credit card but then they drop a bombshell – they don’t accept cards!
Unfortunately, while it’s technically possible to buy a car on credit card, not all dealerships will accept it as a form of payment. And even if they do, they might not let you put the full balance on your card.
There are a few different reasons for this, but one of the most persuasive is that a card handling fee will likely apply. This could be up to 3% of the car’s purchase price and, crucially, the dealership isn’t allowed to pass this fee on to you.
Not only does that mean they’ll be missing out on any commission they might receive for arranging your car finance, but it’ll also cost them money to process your payment.
Will I get credit card protection?
One of the reasons why we use our credit cards to pay for large purchases is that extra consumer protections apply.
If you spend between £100 and £30,000 on a card purchase, the transaction will be covered by Section 75 of the Consumer Credit Act. This legislation makes the card provider share responsibility for providing the item or service with the company that you bought it from.
That means you might be eligible to get a refund from your card provider if you don’t get the service you paid for or there’s an issue with the car that the dealership isn’t willing to resolve.
You might even enjoy these extra protections if you’ve only paid for part of your car purchase on credit card.
How paying for a car with a credit card works
If you do find a car at a dealership that’s happy to accept credit card payments, the process isn’t quite as simple as handing over the card and entering your pin.
Step one is getting permission from your card provider. If you skip this step, you might find that they block your attempt to spend such a large lump sum. This might be to protect you from potentially fraudulent transactions or because car purchases are prohibited in their T&Cs. Take time to check through the rules and regulations before heading to the dealership and don’t be afraid to be upfront and honest with the credit card company.
If your credit card limit isn’t high enough to cover the full cost of your new wheels, you might need to split the balance across two cards, pay the outstanding amount in cash, or arrange an alternative type of car finance.
Once the payment is accepted, your card provider will pay the full amount on your behalf. You’ll then be responsible for paying them back over the next few months. If you can’t pay off the full balance before your next statement, you may need to pay interest on the outstanding amount, unless you have a 0% interest card.
You’ll need to make at least the minimum monthly payment amount to avoid falling into arrears. Setting up a direct debit could be a good way of ensuring you don’t accidentally miss a payment.
What are the benefits of using a credit card to buy a car?
If you’re wondering why someone would want to buy a car on credit card, especially when it’s not accepted by every dealership, it might be worth looking at the pros and cons.
Benefits of using a credit card include:
Lower payment amounts
The minimum monthly payment amount on your credit card can be lower than other types of finance. However, if you only pay this minimum amount, it could take longer to pay off the balance and you may end up paying more in interest overall.
Extra consumer protections
When paying by card, you’ll be protected by Section 75 of the Consumer Credit Act. This means you might be entitled to a refund from the credit card provider if there’s an issue with your car.
Bonus points and rewards
Depending on the type of credit card you have, making purchases could help you earn cashback or build up points that you can redeem as shopping vouchers, air miles, and more.
0% or low introductory interest rate periods
If you have a good or excellent credit score, you might qualify for a card that offers a low or 0% introductory interest rate. This means that, if you can repay the balance between the introductory period ends, you could pay little or no interest. Keep in mind that the interest rate charged once these limited time offers come to an end can be high.
What are the drawbacks of using a credit card to buy a car?
There are some disadvantages to consider when deciding whether to buy a car with a credit card.
Cons of this payment method include:
May take longer to pay
Unlike a hire purchase (HP) or personal contract purchase (PCP) finance agreement, you won’t be required to agree to a set loan term. This means that, if you only make the minimum payment amount each month, there’s no restriction on how long it might take you to clear the balance. Interest will continue to be applied throughout the months and taking your time can quickly add up.
Not all dealerships will accept card payments
Several dealerships refuse to take credit card payments or will limit the amount you’re allowed to put on your card as they need to pay a percentage fee to process the payment.
Interest rates can be higher
Depending on your individual circumstances, credit card interest rates can be higher than they would be with HP or a personal loan. In October 2023, the average interest rate paid by households on their credit cards was 23.8%. If you compare this to our representative APR of 14.8%*, using a credit card could be a more costly way to fund your car purchase.
Not everyone will qualify
Your ability to secure a credit card, especially one with a low or 0% interest rate and high credit limit, will depend on different factors. Typically, you’ll need to have a strong payment history and a good or excellent credit score.
If you’ve never had credit before or missed payments in the past and your credit score now needs some TLC, you’re unlikely to qualify for the credit limit you need to buy a car.
Needs self-discipline
Often, there’s no fixed payment amount – other than the monthly minimum – that you need to pay off on your credit card. This means that it’s up to you to manage your budget and make sure you’re paying enough each month.
It’s especially important if you’re hoping to pay off the balance before your introductory interest rate ends. You’ll need the self-discipline to work out exactly how much you need to pay each month, even if it’s not technically required.
What alternatives are available?
As well as buying a car outright in cash, there are several different types of car finance available if a credit card purchase isn’t right for you:
Cash
Buying a car in cash is usually the cheapest way to purchase a vehicle as you won’t have to worry about paying interest. However, it does mean you have to have a substantial amount of savings available to spend and you won’t have the flexibility that can come with certain types of car finance like PCP and leases.
Hire Purchase (HP)
Hire Purchase – or HP for short – is one of the most popular ways to finance a car. You’ll typically put down a deposit upfront and then pay back the loan in fixed monthly repayments for between one and six years:
- At the end of an HP loan, assuming you've made all your repayments, you’ll pay a small Option to Purchase admin fee to become the car’s legal owner.
- HP loans can have higher monthly repayments as they lead to car ownership, but you won’t usually have to worry about an annual mileage limit.
- During the loan term, the lender will be the car’s legal owner so you can’t make any modifications or sell the car.
- HP finance can be more accessible to borrowers with less than perfect credit scores.
Personal Contract Purchase (PCP)
Personal Contract Purchase – also known as PCP – gives you options. Like HP, you’ll pay a deposit upfront and then make fixed monthly repayments for a set period. But PCP doesn’t have to lead to car ownership:
- When your PCP loan ends, you can make a large one-off payment to buy the car (known as the balloon payment), hand it back to the lender, or use any positive equity available as a deposit in a new deal.
- Instead of borrowing the car’s full purchase price, your loan payments will cover the difference between its current price and how much it’s estimated it’ll be worth at the end of your agreement (its Guaranteed Minimum Future Value or GMFV).
- PCP can have lower monthly repayments than HP, but you’ll have to pay a large one-off balloon payment, usually equivalent to the GMFV, to become the car’s legal owner.
- An annual mileage limit will likely apply, and you’ll face an extra charge for every mile you go over it.
Personal Loan
Personal loans work quite differently as they (usually) aren’t secured against the vehicle. Instead, you’ll become the car’s legal owner as soon as you’ve used the loan to pay the dealer or private seller:
- As its legal owner, you’re free to sell the car, go on a cross-country road trip, add a new set of alloys, or install an upgraded sound system if you like. You just need to make sure you keep making loan repayments until the agreement ends.
- Unsecured loans present more of a risk to lenders, so they’re usually restricted to people with a strong payment history and good credit score.
- Monthly payments can be higher than other finance options.
Personal Contract Hire (PCH)
Personal Contract Hire – also known as PCH or leasing – is a lot like a long-term car rental and rarely ends in car ownership.
- Lease agreements usually last between two and four years and you’ll pay a fixed monthly payment during this time.
- You’ll typically need to hand the car back at the end of your lease.
- An upfront deposit is usually required.
- You’ll likely have to agree to an annual mileage limit and keep the vehicle in good condition to avoid extra charges.
