There are both benefits and risks associated with transferring the balance of a car loan on to a credit card. When this strategy is done effectively, it will allow you to own your car ahead of the loan term's schedule and potentially reduce the interest you will pay. Before initiating such a balance transfer, make sure you understand what the process entails and how to avoid the possible risks.
Interest
One of the benefits of transferring a car loan to a credit card is the ability to move the debt to an account with a lower interest rate than the original lender. To take advantage of this benefit, you have to have an active consumer credit card account that both allows balance transfers and has a balance transfer interest rate that is lower than that which is associated with your current car loan.
The potential risk of transferring a car loan balance involves the terms of the car loan you signed. Some financing agreements structure the total amount of the loan, including the interest. This means that the balance of the loan already includes the projected interest and transferring the loan on to a credit card could increase the amount of interest you will eventually pay.
Credit Impact
There is the potential for balance transfers to negatively impact your credit rating. Credit card debt is revolving debt, while the debt of a car loan is installment debt. While no amount of delinquent debt is good for your credit, unpaid revolving debt can lower your credit rating more than neglected installment debt. The best way to avoid negatively impacting your credit is by paying off the credit card balance within a year or before any promotional "no payment" term ends. A number of financial experts believe that an ability to repay a transferred loan balance should logically mean you could have repaid the loan without moving the balance on to a credit card. Keep this in mind while making the decision whether or not to transfer a car loan balance on to a new or existing credit card.
The possible benefits of transferring the balance of a car loan to a credit card can save you money on long-term interest payments while allowing you to take ownership of your car sooner than the original financing would allow. Keep in mind the risks, such as potentially damaged credit and inadvertently paying even more in interest, before making the choice to transfer a car loan balance to your credit card.
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