If you have great credit, getting a cheap car loan at under 5% can be easy. On certain models that the car companies are anxious to push, you can go as low as 0% with the manufacturer’s own financing. What do you do, though, if you want 0% financing on a model that doesn’t have it? One possible answer is that you apply for an auto loan and then move the loan to a 0% balance transfer credit card.
The credit card companies are really pushing their interest-free balance transfer cards now. If you have good credit, you probably have a few of these credit card offers. These cards allow you to transfer more than balances from other credit cards. They allow you to transfer auto loans, too.
The very idea of transferring a car loan to a credit card can sound irresponsible. Is this really a good idea?
You risk your credit this way
The credit bureaus don’t view all kinds of loan in the same way. If you take out a car loan or a home loan on which you pay monthly installments, these are considered benign loans. Revolving credit – where you are allowed to revolve a balance from one month to the next – is considered risky debt. When you move debt from a car loan to a credit card, you turn a benign loan into something that’s bad.
Adding thousands of dollars to a credit card can be risky also because it is likely to heavily leverage the card. A card that is close to its spending limit is considered a bad sign by the credit bureaus.
You need to be able to pay it all back
While interest-free balance transfer credit cards do offer you a free ride, it doesn’t tend to be a long one. The most you will get is 18 months. If you don’t pay off your balance by then, you need to start paying a high level of interest with retroactive effect. If you still have $1000 worth of unpaid debt left when your interest-free period ends, you will need to pay interest on it right from the day you transferred the balance. There could also be a 3% balance transfer fee involved.
If you don’t plan well and pay off everything in time you could end up losing money on the deal.
The bottom line
If you want an interest-free loan to buy a car, your best bet would be to settle for a model that comes with an interest-free offer by the dealer. It can only make sense moving your car loan to a credit card if you are desperate for a particular model of car and you’re completely sure that you can pay it all off in the interest-free time allotted.