Putting away a new suit or placing a dinner tab on your credit card is very normal. However, using a credit card for a down payment on a house or car is not. The APR on credit cards is generally considerably more than on a loan even a subprime loan. Because there are large credit card APR that comes with large purchases, both for the seller and the buyer, using a credit card for a down payment may not always be the best decision.
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Should You Use a Credit Card for an Auto Loan Down Payment?
For the first time ever, auto loans rose above $1 trillion in 2016. The total balance of open car loans rose to over $1 trillion in Q1 of 2016, up from $905 billion during the same time last year, according to Experian’s State of the Automotive Finance Market report.
With all these loans this means that a lot of down payments comes with it. Making a down payment can be an issue if you are low on cash, at the same time, it can be an opportunity to rack up credit card rewards if your card offers them.
Before you start planning prematurely for your vacation with all the rewards you will get, make sure the car company lets you pay by credit card because some don’t. Car dealerships don’t allow credit cards as form of payment for a couple of reasons. They have to pay transaction fees, which can average from 1percent to 4 percent of the purchase price, to credit card issuers, which can harm their profits. Additionally, credit card holders have chargeback rights, which gives them the right to ask for a refund if they feel like they have been charged wrongfully.
Due to very high APRs for credit cards, it is too expensive to charge your whole down payment if you can’t pay off the balance right away. To avoid unnecessary credit card debt and high interest rates, consider saving up for a down payment rather than charging it.
How to Use a Credit Card for a Down Payment on a Car
If you have enough available credit to pay for the down payment on a vehicle, call dealerships to find out if they accept credit cards as payment and if they have a limit on credit card usage. Although some dealerships might accept credit cards, they could have a cap on how much you can charge.
Additionally, you can use a credit card to get a cash advance and use the money toward your down payment. However this is a costly way to use your credit card. Before you decide to do this method, research the card’s cash advance fees. Some card issuers will charge you a flat rate while others charge a flat rate plus a percentage of the transaction.
Keep in mind that if you do get a cash advance on your card, have a repayment plan in mind. Cash advances usually accrue interest, which you can minimize by paying back the advance as soon as possible.
Should You Make a House Down Payment With a Credit Card?
Basically speaking, you can make a down payment on a house with a credit card if you get a cash advance. If the house is relatively low cost enough and your credit limit is high enough, you could even buy the whole house on your card, according to Nasdaq. If you have an FHA loan, however, you probably won’t be doing this because these types of loans are designed to prevent homebuyers from getting into mortgage loans they can’t afford and using a credit card as a down payment might be seen as a red flag.
Mortgage servicing companies typically don’t allow you to pay for your mortgage each month on a credit card for the same reasons as dealers don’t like to let buyers use credit cards as down payments. If you really want to pay your mortgage with a credit card, however, you can use a third party like Venmo or Tio, which will do that for you — for a fee. Check out those fees before you make a decision.
How to Come Up With a Down Payment on a House
Instead of paying a large cash advance fee and high interest, there are other methods you can do to get money for a down payment. Depending on your employer, you might be able to get a loan from your 401k.
You’re probably hesitant though about messing with our retirement savings, but if you are investing in a home and need a down payment it might be a good time to tap into those funds. Check with your plan’s administrator and get all the details regarding your plan before taking out a 401k because plans and employers’ policies will differ.
Using a credit card as part of your down payment for a big purchase, such as a house or a car, is a serious financial decision because the wrong steps can hurt you financially. Lucky for you, we’ve broken down your options and answered some vital questions that will help you make your decision on whether or not you want to opt into a down payment using your credit card. With conventional apps like Venmo or Tio, you can avoid fees that credit card issuers try to impose on you if you were to use their card to make a cash advance. For more post like this, check out our list of bank guides.