Car loan payments can eat up a huge part of your monthly income. This is why many people think of ways to pay it off soon in the most money-saving way. One smart idea is transferring the balance of the loan onto a zero-interest credit card. But is this really a smart move? Here are some reasons why it may not be so.
1. Your credit could get hurt.
We’ll first explain what really happens when you transfer your auto loan balance to a credit card. Your auto loan is an example of a secured debt. That means your car, an asset, serves as the collateral for the loan. Credit cards are unsecured and do not require a collateral. This is why a balance transfer often sounds good because you will be able to escape the high interest rate and save your car from possible repossession.
Unfortunately, this move can actually have an effect on your credit score. By putting your loan balance onto a credit card, you close a credit account that is, your auto loan. This could affect your payment history and increase your credit utilization, which could lower your credit score.
2. The same thing could happen all over again.
A lot of people are convinced to use their credit cards to pay off their auto loans because many banks offer 0% APR. But before you get too excited about that attractive rate, know that it will not stay like that forever. There’s always a fine print that says the zero-percent interest is available until a certain time (for example, 18 months). After such time, the interest rate will no longer be zero percent.
The problem is people are usually not able to pay off the debt before the zero-percent-interest window closes. Thus, they end up paying with interest, just like their previous situation with their auto loan. Worse, you could be paying more than if you have just stayed with your auto loan.
3. It may not be the solution.
Using your credit card to pay off your auto loan is one of the several ways you can probably think of to get out of the debt and still be in good shape. But are you sure that’s what you really need to do? Try to step back and take a good look at your financial standing. Scraping around for cash may not be the solution.
Instead, consider improving your financial status by creating a viable and realistic budget. Commit to stick to it and never compromise. Know where your money is going by monitoring your expenses. Strive to repay your auto loan with an amount that is higher than your monthly payment. This will get you out of debt faster.
To wrap up, paying off your car loan with a credit card may not work for everyone. Don’t rush into a decision. Instead, look farther and calculate the long-term risks and benefits of a balance transfer for an auto loan payoff.