Yes, it is possible to buy a car with a credit card in Australia. However, it largely depends on whether the dealership accepts card payments for vehicle purchases.
Some may allow full payment via credit card (provided your credit limit can cover the cost), while others might permit only partial payments (i.e., just the deposit) or impose a cap, typically a couple of thousand bucks. Some dealers may not accept credit cards at all.
If you're buying from a private seller, this option may not be entirely available. Most sellers are not set up to process credit card payments. The risk of payment disputes, fraud, or chargebacks may also be a reason for them to refuse.
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Key considerations when using a credit card to buy a car
Credit limit and utilisation
Given that new cars typically cost from upwards of $30,000, and quality used cars typically start at $10,000, you need to have a sufficient credit limit if you're using your card to buy a car.
In Australia, the credit limit varies depending on the card type, the issuer, and the cardholder's income and creditworthiness. It could range from $2,000 up to $100,000+ (typically available only for those with substantial annual incomes).
Even if your credit card can cover the cost of the car you intend to purchase, note that maxing out your credit limit could negatively impact your credit score. A high utilisation ratio suggests financial stress and can raise a red flag, especially if you carry large balances month to month.
Interest rates and repayment terms
Credit card interest rates in Australia can top 20% p.a. - significantly higher than typical car loan rates of between 5% p.a. and 15% p.a. (advertised rates). Interest accrues immediately unless you're in a 0% promotional period or repay in full within the interest-free window.
Cars are big purchases, so unless you're prepared and able to repay the full statement balance by the due date, you could end up paying thousands in interest.
Say, you're buying a $20,000 car on a credit card at 19.99% p.a. If you carry a balance within a year, you will pay approximately $1,104 in interest, bringing your total cost to $21,104.
On the other hand, if your repayment stretches to five years, you could pay over 50% more than the car's original price. See table below to get a clear picture.
|
Repayment time |
1 year |
5 years |
|
Monthly repayment |
$1,842 |
$529 |
|
Interest paid |
$1,104 |
$11,740 |
|
Total cost |
$21,104 |
$31,740 |
These are approximate estimates based on minimum payments plus interest; actual amounts may vary.
In comparison, a car loan at 6% p.a. over five years on the same $20,000 vehicle would result in around $3,199 in interest, bringing the total cost to $23,199. This is less than a third of the total interest you might pay on a high-rate credit card. Your monthly repayments are also lower at $387.
See also: InfoChoice Car Loan Calculator
Fees and surcharges
Dealerships may charge merchant service fees (typically 1-2%) for credit card transactions. This surcharge covers processing fees that the seller passes on to the buyer, especially for high-value purchases like vehicles, as absorbing this would eat into their margins.
On a $20,000 car, a 2% surcharge would add $400 to the transaction. Note, however, that under Australian Consumer Law, surcharges must be limited to the actual cost of acceptance, meaning dealers cannot profit from this.
Another thing to take note is if your purchase would be classified as a cash advance. Some cards may treat large purchases as a cash advance, especially if payment platforms, such as PayPal, BPay, etc., are used. This can happen without warning, and you may only find out when your statement shows the transaction classified as such. Cash advances also do not typically have interest-free periods.
How to buy a car with a credit card
If you are set to use your credit card to buy your dream car, follow these steps.
- Check your credit limit and make sure you have enough to cover the cost (whether it's the full amount or just the deposit).
- Confirm that the seller accepts credit card payments and whether they allow full or partial payments.
- Ask the dealership what kind of surcharge you'll have to pay for using your credit card, and whether they will process it as a purchase or a cash advance. Surcharges and cash advance fees can go up to 3% of the purchase price; thus, doing this will help you avoid or prepare for the hidden costs such transactions entail.
- Swipe, tap, drive, and repay. Be proactive in repaying the balance to avoid interest charges.
Think before you tap your card for a car.
Pros and cons of buying a car with a credit card
In some cases, using a credit card to buy a car may make sense or actually be the better option. Depending on the circumstances and several factors, however, it can be financially risky.
Benefits
Reward points - If you have a rewards credit card, using it for high-value purchases like a car can earn significant points that you can redeem for flights, shopping credits, or cashback.
Instant purchase - Unlike a loan, which you have to wait until it's processed and approved, a credit card allows you to buy a car right away. Tap it and get behind the wheel on the same day. This can be useful in private sales or time-sensitive purchases.
Zero interest - Many cards offer up to 55 days interest-free or 0% interest on purchases for an introductory period. If you repay within the offer period, you could avoid paying interest altogether.
Payment flexibility - Credit cards don't lock you into fixed repayments like personal loans do. So you can choose to pay the balance off as quickly or as slowly as you like (though interest may apply).
Purchase protection - Many cards, typically premium and rewards credit cards, often include complimentary insurance features such as extended warranty and dispute resolution via chargebacks. These cards also typically have purchase protection in case of loss or accidental damage, though vehicles are often excluded from this coverage.
Drawbacks
High interest rates - If you don't pay off your balance quickly or in full within the zero-interest period, you could end up paying thousands in interest.
Surcharges and annual fees - Dealers may apply a 1-2% surcharge for credit card payments to cover merchant fees. Cards also typically come with annual fees. All these can add to the cost of your car purchase.
Credit limit constraints - Unless you're using a high-limit credit card, many of these plastics don't have limits high enough to cover the full cost of the car. You may need to request a temporary credit limit increase. Note, however, that once reverted, you could suddenly be over your original limit if your balance hasn't been repaid.
Potential for long-term debt - Without a structured repayment plan like a car loan, it's easy to fall into revolving debt. Most credit cards allow you to pay as little as 2-3% of the outstanding balance each month, so without proper management, you run the risk of being in debt long-term, which could cost you thousands in interest.
Impact on credit score - A large credit charge can spike your credit utilisation ratio, a red flag that suggests you may be financially overextended or reliant on credit. This can negatively affect your credit score, which in turn may reduce your borrowing capacity or make it harder for you to get other loans.
Alternatives to credit cards
While credit cards allow you to buy a car quickly, let you pay as little or as much as you like, and even earn substantial reward points (if applicable), they often come with financial risks if not managed properly.
If you can't repay the balance within a few months, or your credit limit isn't high enough, it might make more financial sense to use other means to purchase the car of your dreams.
Car loan
A car loan is a personal loan specifically designed for the purchase of a motor vehicle. They typically have lower interest rates than credit cards, especially if the loan is secured or backed by collateral, which usually is the car itself.
If the loan is fixed, interest is locked in, and your repayments remain constant over a set loan term (e.g. 1 to 7 years). This means you know exactly what you owe, how long you'll pay off the debt, and when the end date is.
Alternatively, repayments can fluctuate for variable rate car loans. Like fixed rate loans though, the loan term remains the same, plus it offers more flexibility to make extra or early repayments.
Note, however, that your credit score and income play a significant role in whether you're approved, how much you can borrow, and what interest rate you're offered. Poor or thin credit files may face rejection or punitive rates.
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Personal loan
A personal loan can be used for a wide range of purposes, which may include purchasing a car. Unlike a car loan, however, which is usually secured against the vehicle, a personal loan can either be secured or unsecured.
Unsecured options tend to have higher rates compared to loans backed by collateral, but they are often more flexible when it comes to the vehicle that can be bought, which is useful when buying a used car or purchasing from a private seller.
Similar to car loans, the approval, the amount you can borrow, and your interest rates are heavily dependent on your credit profile.
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Novated lease
A novated lease is a three-way salary-sacrificing arrangement between you, your employer, and a leasing company. Under this setup, your employer leases the car on your behalf, and your lease payments are deducted directly from your pre-tax salary.
This payment structure can result in significant tax savings, since lease payments are made from your pre-tax income. A novated lease can also be structured as fully maintained, meaning it covers car repayments, registration, insurance, and servicing and repairs.
While this allows you to spread out payments over time, resulting in improved cash flow, you typically face a balloon payment at the end of the lease to take ownership of the car. Additionally, a novated lease is tied to employment, which means if you leave your job, it may transfer to your next employer (if they agree) or revert to a standard finance lease with you becoming personally responsible for all payments.
Savings
Using your money remains the most cost-effective way to buy a car. It may take a while to save up for your dream car, but this way, you don't have to worry about interest, fees, and the risk of adversely impacting your credit score or borrowing capacity. It could be more prudent to use money meant for your new set of wheels and not dip into your emergency savings.
You may opt to park your "car fund" in a high-interest savings account or a fixed term deposit to earn more interest on your money as you wait to reach your savings goal. However, you'll have to weigh up the 'opportunity cost', which means what you could stand to gain from using that money to invest versus the cost of any car loan interest.
Images by why kei and Nathana Reboucas on Unsplash
