Should you transfer a car loan to a credit card?

It makes financial sense to seek the lowest interest rate possible when borrowing money, right? The average credit card annual percentage rate (APR) is nearly 21 percent, far higher than the average car loan interest rate. Still, you might be tempted to transfer a car loan to a credit card if you can get a strong 0 percent introductory APR offer from a top credit card.

If you qualify, you’ll get a 0 percent APR for a set time period, typically 12 to 21 months. Plus,  you might even earn rewards from your new credit card along the way.

But is transferring a car loan to a credit card a smart choice? The answer depends on whether you can afford to pay off the loan during your introductory period, among other factors. Let’s start by looking at the impact this kind of balance transfer might have on your finances, then dive into what you should ask yourself before you commit.

Should you transfer your car loan to a 0% intro APR card?

Because the majority of car loans will have a lower interest rate than a credit card and will take longer than 12 to 21 months to pay off, it’s likely not worth it for you to transfer your car loan to a credit card — even one with a 0 percent introductory APR offer. However, that’s not the case for everyone. Depending on the size of the loan or how long you’ve been paying it off, it might be a smart move that could save you money in interest payments.

To better understand how transferring your car loan to a credit card could impact your finances, consider the advantages and disadvantages of the transfer, as well as what might happen to your credit score:

Pros and cons of transferring a car loan to a credit card

Pros

• You could save hundreds of dollars in interest over the life of the loan.
• You may reduce your monthly payments.
• You may earn credit card rewards with the new charge or balance transfer.
• The loan company will release the lien on your car and sign the title over to you. This means the auto loan company can no longer seize your vehicle if you fail to make payments.

Cons

• Your credit score may drop due to taking on more revolving debt and increasing your credit utilization ratio.
• If you miss a payment on the credit card, your APR could skyrocket.
• If you can’t pay off the balance transfer or new charge during the introductory period, your interest rate may be higher than it was on your vehicle loan.
• If your 0 percent APR introductory period is shorter than your remaining car loan term, your monthly payment may be higher.

The impact on your credit score

Transferring a car loan to a new credit card can impact three key credit score factors:

• Credit mix. Your credit mix accounts for 10 percent of your FICO credit score. It refers to the different types of credit lines you have, like credit cards, student loans, mortgages and auto loans. Having a diverse mix is a good thing, and if you eliminate the only installment loan on your profile, you are reducing your credit diversity.
• Credit utilization. Your credit utilization ratio accounts for 30 percent of your FICO score and refers to the amount of credit you’re using compared to the total amount you have access to. If putting the balance of your vehicle loan on your card brings you closer to your credit limit, you will also reduce your credit score due to high credit utilization.
• New credit. This factor accounts for 10 percent of your FICO score and involves the hard inquiries you get almost any time you apply for new lines of credit — balance transfer credit cards included. The dip is temporary, but your credit score will still likely drop by a few points.

Because of these factors, transferring your car loan may not be a wise choice if you are looking to secure a mortgage or another car loan within the next year.

Instead, you might consider an option with fewer credit implications, like refinancing your auto loan. Refinancing can have a temporary credit score impact, but it’s typically minimal.

If you already have another installment loan (like a student loan or personal loan) in your credit profile and the balance transfer doesn’t approach 30 percent of the available credit on your card, the effect on your credit score will likely be minimal.

Questions to ask yourself before transferring your car loan to a credit card

Now that we’ve gone over how a loan could impact your credit, let’s look at some specifics. Before deciding to open up a 0 percent introductory APR credit card and transfer your car loan balance to it, ask yourself these questions:

Do I qualify for a credit card with a good 0 percent introductory offer?

The best 0 percent APR credit card offers are typically extended to those with a credit score of 720 and above. These cards may also come with cash-back rewards or other benefits.

If you have poor-to-average credit, it’s easier to get an auto loan than a credit card. Car dealers and alternative lenders may extend credit to poor-credit customers with credit scores of 580 and below. Even if you have declared bankruptcy, you can find a car loan — but the interest rates will be high.

The same can’t be said for credit cards. While there are credit cards available to those with a low credit score — such as secured credit cards — those credit cards won’t typically be good for balance transfers. Many don’t allow them, and for those that do, the amount you can transfer will be limited by the size of your cash security deposit. They also typically do not offer a 0 percent intro APR period.

Plus, if you do find balance transfer cards for bad credit, you’ll find that their interest rates aren’t typically better than those for auto loans.

So, unless you have a good enough credit score to qualify for one of today’s top 0 percent introductory APR cards, you’ll likely be better off with just the car loan.

Will my dealership allow me to transfer my auto loan?

Not all dealerships allow you to transfer your auto loan balance to a credit card. You’ll want to read your auto loan terms carefully and clarify any questions you have with your dealership before you apply for a balance transfer credit card.

Will I face a prepayment penalty for paying off my loan early?

Some loan issuers will penalize you for paying off your loan early — which is essentially what will happen when you turn your auto loan debt into credit card debt. If you pay off your loan early, the loan issuer won’t get as much interest from you, so to stop that from happening, they might put a prepayment clause in your contract. Check your contract carefully to make sure you won’t get penalized for transferring your balance.

Will my credit card’s limit be enough for the loan?

Your balance transfer credit card will come with a credit limit, just like traditional credit cards. If your loan amount exceeds the amount of your available credit, you won’t be able to transfer it all to your card. You’ll also have to factor in any balance transfer fees you have to pay.

How long will I need to pay off my auto loan?

Did you just get your auto loan, or have you been paying it off for a while already? Auto loan repayment periods tend to be far longer than credit card introductory periods, so if you just got your loan, you might not be able to pay it all off within the introductory period of a credit card.

For example, auto loan terms can exceed 84 months, while even the best introductory APR offers top out at 21 months. Having an auto loan with a longer repayment term means you’ll wind up paying more in interest, but it also means you’ll have lower monthly payments.

But what if you’ve already been making payments for a while? In that case, your introductory period may match or exceed your remaining auto loan term, which means you’ll likely get to save money on interest for at least a year. Similarly, if you paid a lot of the costs for your car upfront and your auto loan is pretty small, you might be able to pay all of that off within a card’s introductory period, too.

How to calculate a credit card’s monthly payments

Knowing how to calculate your new credit card payments will help you decide whether it’s worth it to transfer over your auto loan.

To calculate your monthly payments at zero percent interest, add any balance transfer fee to the total loan amount. Then, divide that total by the number of months your intro APR offer would last.

Or, instead of doing the math by hand, check out Bankrate’s credit card balance transfer calculator to preview your monthly payment and savings.

Auto loan vs. credit card savings example

Let’s check out an example of what those savings might look like when compared to a $10,000 auto loan at a rate of 4 percent for 36 months. We’ll compare the loan to a credit card with an 18 month intro APR offer, as well as a credit card that has no intro offer and an APR that’s close to the current credit card interest rate average — each with a 3 percent balance transfer fee:

As you can see, you’ll pay significantly less per month with your full auto loan over the span of 36 months than you would with a 0 percent intro APR credit card over the span of 18 months. However, using a balance transfer card would allow you to save significantly on interest payments — but the balance transfer fee you have to pay will cut into those savings a bit.

Let’s now consider a scenario in which you have the same auto loan but already paid half of it off before deciding to transfer the balance:

With this example, you’ll not only save on your monthly payments, but you’ll also save significantly on your interest, even with the $150 balance transfer fee factored in.

These examples show that if your credit card’s introductory APR period is the same as the number of months left on your car loan, you’ll generally pay less each month than you would on the car loan.

If you use a credit card’s introductory period to extend your loan, meaning that your card’s introductory period is longer than the amount of time left on your auto loan, you can drop your monthly payments even further. This could free up working capital to pay down higher-interest debt, put in a high-interest savings account or even pay for emergency expenses.

If your introductory period is shorter than the remaining car loan term, on the other hand, your monthly payment may grow instead. But if your budget allows it, the extra expense might be worth it for the overall savings you’d enjoy by not paying interest.

How to transfer a car loan to a credit card

You can handle your auto loan balance transfer by following these steps:

1. Read both the card agreement and the auto loan contract carefully

If you’ve decided that it’s worth transferring your car loan to a credit card, you’ll want to make sure you know exactly when your card’s introductory period ends. You may also have to complete the balance transfer within a set time period if you want the promotional interest rate applied — for example, you might not get your promotional APR offer if you complete your balance transfer after 90 days from account opening.

2. Talk to your auto loan issuer about their preferred balance transfer method

Some loan issuers only permit payments via check, cash, ACH direct transfer or money order. In that case, the only way forward is to use a balance transfer check, if your issuer provides them.

You can also transfer a balance directly from your car loan company to your credit card issuer. You’ll need to provide your issuer with your loan account number, the address where you’d mail payments and the name of the loan company. If you’re used to making online payments, it’s a good idea to call your loan provider to confirm this information.

3. Complete the transfer and pay any associated fees

Transferring a balance to a credit card is not typically free. Usually, your credit card issuer will charge you a balance transfer fee, which typically ranges from 3 percent to 5 percent of the total amount transferred.

The bottom line

If you do choose to transfer your car loan to a balance transfer credit card with a 0 percent introductory interest rate, be sure to have a good understanding of both your loan issuer and credit card issuer policies for doing so, as well as the requirements to get the introductory rate with no penalties.

You’ll have the best results if your credit card’s introductory APR period is longer than or the same length as what’s left of your car loan.