CC Debt versus Auto Loan

**savingmama** · 10-01-2008, 05:20 PM

One thought that immediately comes to mind is that with a car loan, your rate is locked. With a credit card, your rate is not locked. Most credit card companies can raise the rate when you miss a payment on something not even connected to your credit card (like your mortgage, water bill, etc.) Now while you may be making all your payments right now, if something were to happen and you missed some other payment, that is not the time when you would want to have your rate increase on your credit card. My advice is to shop around for a car loan. I bet your could find a rate lower than 8.7%, but then again I know rates and availability to borrow money is a little unknown with the economic crisis, but I would definitely try.

**disneysteve** · 10-01-2008, 06:11 PM

I would not use the CC for a few reasons:

1. As noted, the rate isn't fixed. It could be 8.7% today and jump to 29.99% next week.
2. Taking a cash advance on your CC typically has a fee that is a percentage of the amount, so that adds to your cost.
3. As you pointed out, using that much of your available credit is bad for your FICO score.

Instead, arrange financing outside of the dealer, either through a bank, credit union or online lender. Lots of places will give you a better rate than the dealer. What I've done in the past was shop for the best rate I could find and then get the dealer to match it, so that's an option, too. What I would not do is just accept whatever the dealer is offering.

**boosami** · 10-02-2008, 04:38 AM

If the dealer allows you to pay for the car with the credit card itself (rather than taking a cash advance) they may try and roll in the ~3% merchant processing fee and further increase the cost to you. I've argued with vendors on this before when purchasing large ticket items on my charge card. It's actually prohibited by their merchant contracts. Ever been to a store that has a "$10 minimum purchase amount" for debit/credit use? That's also prohibited in their merchant contracts, believe it or not!

Do an auto loan. You'll get a better deal than purchasing on credit and it will have a better effect on your credit score (raising your total credit limit amount and further diversifying your account types).

**bjl584** · 10-02-2008, 07:05 AM

The only pro that I can think of off the top of my head is that if you would default on the loan you can't have the car repoed, since cc debt is unsecured.

**Like2Plan** · 10-02-2008, 07:23 AM

Here's another (possible) con--you can probably obtain a better rate getting a car loan especially through a credit union--PenFed has rates of 4.75% for used carsLink to PenFed
You could join the credit union and get prequalified for the loan before you go shopping for your car.

Con: the shrinking credit market may have impact on your CC. Credit Card companies change the terms of your CC all the time. They could lower your limit (after you have already made your purchase) and then charge you fees for being over the limit...

Con: Also, as previously mentioned--generally the fixed rate is not locked in unless you are participating in some sort of promotion.

Con: It is possible that you might need the CC for an emergency in the future. (Car breaks down or you need to book a hotel for an emergency visit back home or a visit to an emergency Dr visit and they will only take cash or credit card. ) Hard to come up with every possible scenario, but suffice it to say it may be something you didn't see coming and you can't get immediate access to your EF--would not be good if your line of credit is all tied up.

**bjl584** · 10-02-2008, 08:19 AM

Originally posted by Like2Plan View Post

Con: the shrinking credit market may have impact on your CC. Credit Card companies change the terms of your CC all the time. They could lower your limit (after you have already made your purchase) and then charge you fees for being over the limit....

Wow....that sounds lik it would be illegal. Unethical at best.

**Like2Plan** · 10-02-2008, 08:31 AM

Originally posted by bjl584 View Post

Wow....that sounds lik it would be illegal. Unethical at best.

Yup-you would think that.
My perception is that CC companies have pretty much a blank check in that they are permitted to change the terms at any time and for just about any reason (which was another discussion thread not too long ago).

But, I also believe a CC should not be used for long term debt. It works best if you use it for short term things as a matter of convenience (by which I mean pay it off in full by the due date each month).

**boosami** · 10-02-2008, 08:39 AM

The CC industry is widely under-regulated. It's ridiculous what they can do and get away with without any sort of justification: raising interest rates, lowering limits, changing payment terms, charging excessive processing and late fees...

**notallboutmoney** · 10-02-2008, 09:50 AM

I to would steer away from the credit car except... my mind starts playing "what if" games on me. Like the following:

Say you want to finance 15000.... does your credit card have a promotional balance transfer rate? Mine all do! Right now its like 2.99% for the life of the balance. Thats much bettter then a car loan and you can make the same payment as you would the car loan and pay it off faster.

or what about this... when you get an auto loan... once you pay it you cant get it back.

With a credit card... you can get it back... unless the CC company decides to lower your limit.. (unlikely but possible).

The point is if you have any kind of savings or EF you can put that right into it therefore cancelling interest... if you need it you can get it back right? But not with an auto loan. So for example

15k loan on an auto loan and you put your 10K EF into it to pay it down to 5k... wow you can pay it off fast now but you have no EF.

Now 15K on a CC and you pay 10K with your EF. No problem... your EF is now working for you to cancel interest and you can still get at it.

I think this would work better and be safer with a HELOC or Personal Line of Credit.

Im crazy... get an auto loan.

**anonymous_saver** · 10-02-2008, 11:05 AM

Wait, you live in NY. Do you live in New York City? If you do, sell your two cars, and don't buy a new one at all?

If you don't live in NYC, do you live somewhere where you could just use public transportation for a year or two, so that you can pay down your CC debt first?

CC Debt versus Auto Loan