Paying off a car loan lends to greater financial freedom – knowing that you do not need to pay EMIs on your car and you own it completely now. It is no surprise that most of us look for ways and means to repay our car loans. Attractive credit card schemes lure us and we are often tempted to avail a credit card simply to transfer our car loan or other loans. But this move has its pros and cons, and it is important to analyze both in depth to avoid getting stuck in a vicious cycle of debt.
How to Transfer The Loan?
One of the most common ways to use a credit card to pay off a car loan or any other loan is to pay off the loan balance with a credit card and then transfer the balance of the loan to a 0% credit card. A balance transfer is where a part or whole of a debit balance (or debt) you owe to another lender is transferred from one card to another, usually to save money on interest repayments. Generally, balance transfer repayments are interest-free for a certain period of time after the transfer.
Another way is to use your credit card’s cash advance facility to pay off the car loan. However, cash advances generally incur very high-interest charges right from the start, without a cooling off period and, therefore, is unhelpful in loan transfers.
How Does it Affect Your Car Loan?
Let us understand what the above procedure means. In effect, you are paying off a secured loan (the car loan) with an unsecured loan (the credit card). You are eliminating the involvement of any collateral and thereby preventing your car from getting snatched away in case you default. This is because a credit card is an unsecured loan i.e. it does not have any collateral attached to it.
How Does it Affect Your Credit Card?
Auto loans are generally of the order of high amounts, often in several lakhs. Transferring such a high car loan to your credit card will result in your credit utilization becoming high, which you should generally avoid if you want to maintain a good credit score.
What is The Advantage?
- If you manage to transfer your auto loan to a 0% credit card and pay off the outstanding regularly, it means that you have paid off your car loan without incurring any interest charges.
- Also, you eliminate the risk of your car being repossessed by the lender in case of a default.
The idea to pay off personal loan with balance transfer thus results in significant cost savings and higher degree of security.
What is The Disadvantage?
- Due to the large value of the outstanding credit, there is a high possibility that you are unable to meet monthly payments. The credit outstanding will accumulate in such situations, leaving you in a vicious cycle of debt.
- A large credit outstanding will negatively impact your credit score. This will make it difficult for you to get loans in future.
- Most balance transfers charge interest at 0% only for a limited time period. If you do not repay the loan before this period, additional interest and penalties may be incurred, making the cost of loan repayment even higher.
Technically, using a credit card to pay off an auto loan is possible. In fact, using a credit card to pay off a student loan, using a credit card to pay off a bank loan, or using a credit card to pay off a personal loan is possible. But the real question is whether you have the payment capability to play within the rules and extract a financial advantage by using a credit card to pay off the loan.