It’s the nightmare scenario that at least flits through the minds of most car buyers: Walking out the door to find a repo man driving off in your vehicle after you’ve encountered some payment issues.
Interestingly, a credit card could be the key to keeping that scenario abstract. It could also help you save a whole bunch of money.
According to a recent CardHub.com study, eight of the 11 largest credit card issuers in the United States allow you to transfer a balance from an auto loan to a credit card in order to take advantage of both a lower interest rate and the fact that credit card debt is unsecured (i.e. not backed by the value of your vehicle). That’s an especially attractive option considering that you can find credit cards offering 0% for up to 18 months.
The issuers that allow auto balance transfers are Barclaycard US, Capital One, Citi, Pentagon Federal Credit Union, USAA, U.S. Bank, and Wells Fargo. The best balance transfer credit card offers from that bunch are listed below, along with the approximate costs you’d incur when using them to pay off a $5,000 balance over the course of two years:
- Pentagon Federal Credit Union’s Platinum Rewards Card: $187 in fees and finance charges
- Discover’s it Card: $209 in fees and finance charges
- Citi’s Diamond Preferred Card: $213 in fees and finance charges
Obviously, if your interest rate is around 4% or less, then you won’t benefit much from these cards. But if it’s higher, you could save hundreds of dollars. For example, if your car loan has an interest rate of 8%, you’d wind up paying at least $429 in interest on that $5,000 balance over the two years it takes you to pay it down.
In case that’s not enough for you, it’s important to expand on the other benefits of transferring an auto loan balance to a credit card.
- Avoiding GAP insurance payments: Lenders typically require borrowers to pay for Guaranteed Auto Protection (GAP) insurance in order to offset the risk associated with default when the balance on a loan exceeds the value of the car it’s backed by. The cost of GAP insurance usually equates 5-6% of your annual collision and comprehensive auto insurance premiums. Eliminating this cost would therefore increase the savings you’d derive from a balance transfer.
- Getting the title sooner: Upon a balance transfer being approved, the credit card company will pay off your obligation with your original lender, triggering the transfer of your car’s title. It doesn’t go to the credit card company, though. It goes to you.
Obviously, you can also use a balance transfer credit card to pay off more than your auto loan. Seven of the eight issuers mentioned above – Discover is the exception – also enable you to transfer balances originating from small business loans, student loans, HELOCs, payday loans, and even mortgages (though it’s hard to see how you’d benefit from doing that). Of course, all major issuers allow transfers from credit cards too.
Whatever type of balance you ultimately decide to transfer, it’s very important that you do so with a plan. You’ll need to determine how much you can comfortably attribute to debt payments each month, how long it will therefore take you to payoff what you owe, and how much you stand to save with all costs considered. In making those determinations, you can’t forget about any balance transfer fees that may apply and the interest you’d incur after the 0% introductory term concludes. A credit card calculator can be very helpful with that.
At the end of the day, balance transfers aren’t for everybody, but they’re attractive enough to at least merit consideration.
Odysseas Papadimitriou is the CEO of both CardHub.com, a leading website that helps consumers find the best credit cards for their needs, and WalletHub.com, a new personal finance social network.