Should You Pay Off a Loan With a Credit Card? A In-Depth Look at the Pros and Cons

Paying off a loan with a credit card can seem appealing. After all, who wouldn’t want to earn rewards or take advantage of an intro 0% APR offer on their loan payment? However, there are risks and fees to consider before taking this route. In this comprehensive guide, we’ll dive into the nitty-gritty details to help you determine if paying off a loan with a credit card makes sense for your financial situation.

An Overview of Paying Loans With Credit Cards

In most cases, you cannot directly pay a loan with a credit card. Auto loans, mortgages, personal loans and student loans typically do not allow credit card payments. However, there are some workarounds like using a third-party payment service or taking a cash advance.

The main reasons one might want to pay a loan with a credit card include:

• Earning rewards on the payment
• Taking advantage of a 0% intro APR offer to save on interest
• Getting temporary relief from a high loan interest rate
• Meeting minimum spend requirements for a sign-up bonus

However, there are risks and extra costs involved that often make using a credit card inadvisable for paying loans. Let’s explore those next.

The Potential Pitfalls of Paying Loans With Credit Cards

While paying a loan with a credit card may seem like a clever money move at first glance, there are some significant drawbacks that could end up costing you more in fees and interest. Here are some of the key cons to consider:

• Higher interest rates Most credit cards have much higher interest rates than other types of loans. The average credit card APR is around 15-25% while rates on mortgages, auto loans and student loans tend to be below 10%. If you carry a balance on the card, you’ll end up paying more interest.

• Balance transfer fees To transfer a loan balance to a credit card, you’ll typically pay a 3-5% balance transfer fee That’s an immediate extra cost

• Cash advance fees and interest: Taking a cash advance incurs fees and starts accruing interest immediately at a higher rate. This is an expensive way to pay a loan.

• Processing fees: Using a third-party payment service often incurs processing fees of 3-5% of the transaction amount. Those fees eat into any rewards or interest savings.

• Credit damage: If you miss payments on the credit card, it could hurt your credit score and lead to higher interest rates.

• Short 0% APR periods: Balance transfer cards with 0% intro APR usually only run from 12-18 months. If you don’t pay off the full balance during that time, high deferred interest kicks in.

As you can see, the additional costs and risks often outweigh the potential rewards or short-term interest savings when paying a loan with a credit card. Next, let’s look at some examples to illustrate when it might make sense and when it’s better to avoid this route.

When Paying a Loan With a Credit Card Can Make Sense

While generally not the best idea, there are some limited situations where paying off a loan with a credit card can be beneficial:

• Paying off a high-interest loan: If you have an existing loan with a very high interest rate, transferring the balance to a 0% balance transfer credit card can temporarily halt interest charges and reduce the total interest paid over the life of the loan. This only works if you will pay off the entire balance before the card’s 0% intro period ends.

• Earning a large sign-up bonus: Sign-up bonuses on rewards credit cards can be very lucrative, often $500-1000 in value. If you have a large one-time expense like property taxes, you may come out ahead even after paying a 2-3% processing fee on that charge. Just make sure you can pay off the balance within the month.

• Accessing funds during a financial crunch: While expensive long-term, a cash advance could give you quick access to funds during a temporary cash flow crunch, avoiding late fees or other penalties on existing obligations. Use this option sparingly and only if absolutely needed.

The common theme is having a plan to pay off the credit card balance quickly to avoid accruing interest charges that outweigh any rewards or short-term savings. Next, let’s look at some examples where it’s better to avoid this route.

When to Avoid Paying a Loan With a Credit Card

In many situations, trying to pay off a loan with a credit card will end up costing you more in fees, interest and potential credit damage:

• Paying off a mortgage or auto loan: Due to large balances and relatively low interest rates, it rarely makes sense to pay off these loans with a credit card. The processing fees and interest charges will exceed any rewards earned.

• Paying student loans: Federal student loans cannot accept credit card payments directly. Workarounds incur fees with no interest rate savings, since federal loan rates are already low.

• Using a 0% card with no plan to pay off the balance: If you lack a solid plan to pay off the transferred balance before deferred interest kicks in, you can end up paying more in credit card interest than you would have on the original loan.

• Putting normal loan payments on a rewards card: While earning 1-2% back in rewards sounds nice, it’s generally not worth the risk of incurring credit card interest, which can rapidly outweigh any rewards earned.

• Trying to manage an unaffordable credit card balance: If your budget is already tight, taking on additional credit card balances that you’ll struggle to pay off quickly can dig you deeper into debt.

The bottom line is it’s smarter to avoid paying loans with credit cards if you’ll carry a balance, you lack a plan to pay off the card quickly, or you’ll incur high fees without interest savings.

Tips for Determining if You Should Pay a Loan With a Credit Card

If you’re debating whether putting a loan on a credit card makes sense, here are some tips:

• Compare interest rates on the loan vs. the card after any intro periods end

• Calculate anticipated fees to see if they outweigh any rewards

• Review your budget to confirm you can pay off the card balance quickly

• Be conservative with estimates and leave wiggle room in your timeline

• Have a backup plan to pay off the balance if something disrupts your finances

• Avoid using the card for ongoing loan payments unless you pay in full each month

• Consider alternatives like a personal loan, balance transfer check, or loan refinance

• Talk to your loan provider to understand if credit card payments are even allowed

Taking the time to run the numbers and create a realistic payoff plan can help you determine if paying off a loan with a credit card will truly save you money or if you’re better off sticking with the original loan terms.

Options for Paying Off Loans With Credit Cards

While most lenders prohibit direct credit card payments, here are some potential workarounds:

• Balance transfers – Transfer the loan balance to a 0% balance transfer credit card. This will incur a 3-5% fee but pause interest temporarily.

• Cash advances – Withdraw a cash advance against your credit line to pay the loan. This has fees and high interest rates so only use sparingly.

• Third-party payment services – Services like Plastiq can process credit card payments to loans for a 2-3% fee.

• Flexible financing plans – Some credit card issuers offer fixed-rate installment loans against existing card limits.

• Refinancing – Take out a new personal loan at a lower rate to pay off the credit card balance after paying the original loan.

Each option has pros and cons. Carefully consider the costs before deciding if any make sense for your financial situation.

Key Takeaways on Paying Off Loans With Credit Cards

Paying loans with credit cards usually results in higher fees, interest charges, and credit risk versus keeping the original loan terms. However, it can make sense in some limited cases like transferring high-interest debt to a 0% balance transfer card. Keep these key points in mind:

• Compare interest rates and fees to determine potential savings, if any

• Have a set plan to pay off the card before deferred interest starts

• Only use intro 0% offers if you can pay off the balance in full

• Avoid putting normal ongoing loan payments on rewards cards

• Be conservative with payoff timelines and budget estimates

• Consider alternatives like personal loans or loan refinancing

• Talk to your lender to see if they even allow credit card payments

With the right approach, paying off loans with credit cards can occasionally provide financial benefits. But in many cases, it ends up costing more than just keeping the loan. Analyze your specific situation carefully before deciding if it’s the right move for you.

The Bottom Line

Paying off a loan with a credit card can be tempting but is often not the wisest financial move due to higher interest rates and fees. In limited cases, it can provide temporary savings and benefits if you have a plan to pay off the card balance quickly.