Is It Smart to Transfer a Car Loan to a Credit Card with 0% Intro APR?

Many people with car loans are curious about the possibility of transferring their debt to a credit card with a zero percent introductory APR on balance transfers. This seems appealing due to the promise of the 0% interest rate, but there are several important factors to consider before making this decision.

Understanding the 0% Intro APR and Balance Transfer Fees

It's crucial to understand that the zero percent interest rate during the promotional period is different from the balance transfer fee charged by credit card issuers. While the zero percent rate is a major selling point, the balance transfer fee can vary, often ranging from 3% to 5%. This fee is a one-time cost that you must pay to transfer the balance, and it's vital to include this in your calculations.

Evaluating the Total Cost

Before deciding to transfer a car loan to a credit card, you need to do a detailed financial assessment:

Current Car Loan Rate: Compare it with the promotional APR on the credit card, which is often higher. Balance Transfer Fee: Calculate the balance transfer fee as a percentage of the transferred amount. For example, a 5% fee means you'll pay an additional 5% of the transferred balance. Repayment Plan: Decide if you can pay off the transferred balance within the promotional period to avoid incurring the higher standard credit card interest rate.

Here is an example to illustrate the calculation:

Original Car Loan Balance: $10,000  Car Loan Interest Rate: 6%  Credit Card Promotional APR: 0% for 6 months  Credit Card Balance Transfer Fee: 5%

To transfer the balance, the credit card company would charge a $500 fee (5% of $10,000). Assuming you can pay off the balance over 6 months, the cost of the promotional APR is zero, and the total cost is only the $500 fee plus any potential late fees or penalties.

Risks and Considerations

There are several risks associated with transferring a car loan to a credit card:

Credit Score Impact: Failing to pay off the transferred balance before the promotional period ends can significantly damage your credit score, especially if you make late payments or miss the due date. Debt Responsibility: If the individual using the credit card is unable to pay the loan, the original borrower could still be held responsible. Thus, the transfer could lead to shared or assumed debt. Credit Utilization Ratio: High credit utilization (having a significant balance on the card) can negatively impact your credit score, making it harder to secure loans or credit in the future.

Alternative Uses of a 0% APR Credit Line

A 0% APR credit line can be a useful tool for various financial needs, such as:

Home Repairs and Improvements: If you're planning some home renovations, a 0% APR credit card can be a more affordable alternative to a high-interest loan or credit. Emergencies: Using a 0% APR credit line for unexpected expenses can be a convenient and cost-effective solution until the funds are available.

It is important to note that while 0% APR credit cards offer attractive terms, the promotional period is usually limited to a few months (6-12 months). After this period, the rate can increase significantly, often to a higher APR.

Conclusion

Transferring a car loan to a credit card with 0% intro APR is not always a wise choice. While the promotional rate can reduce your interest costs temporarily, balance transfer fees and the risk of increased interest rates post-promotional period can negate the benefits.

Before making a decision, thoroughly assess your financial situation, the terms of the credit card, your ability to pay off the balance, and potential risks. Considering the balance transfer fee and the likelihood of repaying the loan within the promotional period is essential. Additionally, exploring other options like home equity loans, personal loans, or using cash to pay off the loan might be more beneficial in the long run.