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When your car needs a sudden costly repair, it can be stressful trying to figure out how to finance it – especially if you’re short on cash.
According to research by the Center for Financial Services Innovation, only 41% of Americans have a rainy day fund set aside for emergencies. Meanwhile, research from AAA found that roughly a third of U.S. drivers don’t have enough cash on hand to pay for a surprise car repair. As a result, many drivers are forced to go into debt in order to quickly fix their cars.
In this article:
- Explore all options when financing a costly car repair
- The benefits of paying for a car repair with a credit card
- The best credit cards to use for car repairs
- How not to finance a car repair
- Bottom line
“When people buy a car, they tend to think in terms of the monthly payment,” said Michael Calkins, manager of technical services at AAA. They will set aside money for their car payment, but then fail to budget for other possible expenses. “Then when it comes times for an annual service or they need a new starter or alternator, they don’t have the money,” he said.
However, a surprise car repair bill doesn’t have to mean financial disaster. There are steps you can take to mitigate the stress – especially if you have a strong enough credit score to qualify for a credit card with a promotional 0% interest rate or other low-cost loan.
Explore all options when financing a costly car repair
According to Stephen Newland, a financial counselor with Find Your Money Path, you may first want to consider asking friends or family for help so that you can avoid going into unplanned debt. Or try negotiating with your mechanic to lower your repair bill, Newland said.
If your personal network can’t help and you still owe a big bill, try checking in with your local credit union or an online lender that specializes in low-rate personal loans. That could also save you money, said Newland – especially if you can qualify for a lower rate than what you’d pay if you just charged the repair to your existing credit card. “Often those rates are going to be a fraction of what credit card rates are going to be,” he noted.
Or, depending on your credit score, you may be able to save even more money by applying for a brand-new balance transfer credit card with a 0% APR. That way, you could potentially avoid paying interest altogether.
For example, “if you end up having to drop $1,000 or more on a big repair and you know that you won’t be able to pay for that fairly quickly, it can be worth your while to look at a balance transfer card,” said Matt Schulz, chief industry analyst with CompareCards. “That can be a good way to reduce your costs.”
If you charged the repair to an existing credit card and then quickly transferred the balance to a card offering a 0% interest balance transfer rate, you could potentially get as long as 12 to 18 months or more to pay off the repair before the card’s standard APR kicks in.
Just make sure you stay laser-focused on knocking out that debt before the end of the promotion period, said Newland. That way, you don’t have to pay interest on the remaining balance.
The benefits of paying for a car repair with a credit card
Credit cards also offer other protections that come in handy if the auto shop bungles the repair or charges more than it promised. For example, under the Fair Credit Billing Act, you have the right to have a payment withheld on a credit card charge (without wrecking your credit score) when you file a dispute with your credit card company if you’re unhappy with the quality of the service you received and can’t get the repair shop to work with you to fix the issue or refund you. You can also file a dispute if a car repair shop incorrectly bills you.
Spreading out payments over time may also work better with your monthly budget so that you don’t fall behind on other household bills and accidentally damage your credit.
Be careful, though: Some credit cards are riskier than they’re worth.
For example, car repair shops sometimes advertise store credit cards with deferred interest financing, says Calkins. But the APRs on these cards often run as high as 28% or more, potentially putting you into significantly more debt. If you fail to pay the balance off in full before the end of the promotion, you could get stuck paying interest on the entire repair, not just the remaining balance. “If you have to get your car fixed and you need [a loan] right away, it’s an option,” said Calkins. “But it’s not an option we would recommend for the average person.”
The best credit cards to use for car repairs
Rather than charge your repair to a shop’s credit card, you’re better off using a general market credit card with more affordable terms. If you have good to excellent credit, you should have plenty of options. For example, depending on what you can qualify for and what’s already in your wallet, you could potentially pay for your car repair with:
A low interest credit card: If you don’t already own a low rate credit card, then it’s a good idea to add one to your wallet – just in a case a sudden big-ticket expense, such as an unexpected car repair comes up – and you need to pay for it right away. Credit cards with rates below 15% can be tough to find at larger banks. However, many smaller banks and credit unions still offer basic cards with relatively low rates. As a rule of thumb, look for cards with interest rates that are below the national average. According to the Federal Reserve, the average credit card currently charges a 15.09% APR.
A card that offers instant access: If you need to apply for a new credit card – or if you want to take advantage of a sign-up bonus or promotional APR to help pay for your repair – consider applying for a credit card that lets you use the card as soon as you’re approved. If you apply for the card quickly, you may have access to your brand-new card number just in time to pick up your car.
Some credit card issuers, including American Express, Bank of America and USAA, will let you charge select cards before you’ve received your physical card in the mail. You may have to sign up for an issuer’s mobile app to qualify, though. For example, Bank of America requires you to apply through the Bank of America mobile app if you want to get instant access to select cards, such as the Bank of America® Cash Rewards credit card - $200 Cash Rewards Offer.
A card with a 0% APR on new purchases: You may also be able to avoid paying interest by charging the bill to a card with a promotional 0% purchase APR. If you don’t currently have a card with an introductory APR and have some time before you need to pick up your car, try looking for a card that offers instant access as soon as you’re approved.
For example, American Express offers instant credit card numbers on all of its credit cards, including the American Express Cash Magnet® Card – $150 Welcome Offer and the Blue Cash Everyday® Card from American Express – both of which offer a 0% for 15 months on purchases, (after 14.99%-25.99% Variable applies).
The information related to the Blue Cash Everyday® Card from American Express and the American Express Cash Magnet® Card – $150 Welcome Offer has been collected by CompareCards and has not been reviewed or provided by the issuer of this card prior to publication. These offers and/or promotions may have since changed, expired, or are no longer available.
A balance transfer credit card: If you don’t have time to apply for a brand-new card before your bill is due, you could also charge the repair to a card you already own and then immediately apply for a balance transfer card with an extended 0% promotion.
To maximize your savings, look for a card that doesn’t charge a balance transfer fee (typically 3% to 5%). You’ll have to act fast, though: Cards that waive their balance transfer fees typically require you to transfer your balance soon after you open the card.
For example, the Chase Slate® card, The Amex EveryDay® Credit Card from American Express and the BankAmericard® credit card all require you to request a balance transfer within 60 days of opening your account in order to avoid paying a balance transfer fee.
A low rate personal loan: You could also charge your repair to an existing credit card and then apply for a low interest installment loan with which to pay off the balance on your credit card. This may be your best bet if your repair is so costly that you don’t think you’ll be able to pay it within a year. The best balance transfer cards typically give you no more than 18 to 21 months to carry an old balance interest-free. Some personal loans, by contrast, offer loan terms lasting as long as five years or more.
The information related to the Chase Slate® card and The Amex EveryDay® Credit Card from American Express has been collected by CompareCards and has not been reviewed or provided by the issuer of this card prior to publication.
How not to finance your car repair
Whatever you do, try to avoid loans with excessively high APRs. Before you settle on a credit card, check the card’s terms and conditions and evaluate the card’s APR, annual fee, penalty charges and any other fees you may encounter. It’s worth being picky about your options. For example:
Don’t use an auto repair credit card if you can qualify for less expensive options: A store card that’s offered by a car repair shop may be easier to qualify for than a general market card with a 0% APR. But with APRs running as high as 28% or more, they can also be very risky.
Many auto repair cards offer just six months of deferred interest financing, which doesn’t give you much time to pay off your balance. If you overestimate your ability to pay off your loan by the end of the promotion, you could wind up with a much bigger bill than you’re prepared to pay.
“The problem we often see with deferred interest credit cards isn’t financial, it’s psychological,” said April Lewis-Parks, director of education with the credit counseling agency Consolidated Credit.
“If you receive six or even nine months of 0% interest, that’s a great opportunity to use that time to save the money and pay off the balance before a steep rate finally kicks in.” But too often, people run into trouble when they procrastinate on their payments.
“Most of us tend to think, ‘I still have a few months to go, so no worries!’ Then it’s too late,” said Lewis-Parks. If you do apply for a card with a deferred interest rate, “be keenly aware of your own procrastinating tendencies,” she said. “And fight against them.”
Also make sure you know exactly what you’re getting into before you apply, says Schulz. “Deferred interest credit cards can work well for you if you follow the rules and use them wisely,” he said.
Don’t apply for a payday loan: Using a payday loan to finance your car repair may be even more dangerous, said Lewis-Parks. “They are never a good idea.”
Payday loans typically charge extremely high fees – often running as high as $15 for every $100 you borrow, according to the Consumer Financial Protection Bureau. If you fail to pay off your loan quickly and are allowed to roll it over, you could be charged even higher fees, causing your debt to surge. Many people choose payday loans because they’re so quick and easy to get, said Newland. But that convenience comes at a cost that you could quickly come to regret.
Don’t let your repair bill sit on one of your existing credit cards: It may also be tempting to just charge the expense to your current card and pay it off over time. However, that can also be a costly decision – especially if you use a high interest rewards card.
For example, if you charged a $3,000 bill to a card with an 18% APR and could only afford to pay $200 a month, it would take you 18 months to pay off your debt and you’d spend $424 on interest. If you transferred that debt to a card with a 15-month, 0% balance transfer offer and no balance transfer fee, by contrast, you wouldn’t have to pay any interest. You’d also get rid of your debt three months sooner.
There are options available if you get hit with a car repair bill that you can’t afford to pay for in cash. But be sure to do your research before you apply for a brand-new card or other lending option: Some loans could cost more than they’re worth.
Once you’ve paid for the repair, start setting aside money in a car fund so that you don’t get surprised again with a bill you can’t afford, says Newland. “It can be used for tires, brakes, oil changes, anything that can pop up,” he said.