Step3 Prophet: Financing a car with credit cards?

Ask if you should finance a car with credit card and most people would say you're crazy. My brother proposed an interesting scenario today though. Would it be a good idea to use a zero interest credit card offer to pay off his car loan, and invest the monthly "car payment" in a savings account? Each year he could do another balance transfer until the car was fully paid and then pay everything off. If you had a $20K car loan at 8% interest for 60 months, it would save you over $4000 in interest over the life of the loan. Invested at 3% you could earn an additional $2000. So you get a $20K for nothing extra and make $6K on the deal (not counting minimum payments and balance transfer fees).

There is a minor flaw in this plan though. It all depends on being able to make a low cost balance transfer each year. If you can't make the transfer, or you miss time your payments, you could end of oweing major finance charges. That's if there are even any 0% APR rates available 4 years down the line. New credit card laws may cause lenders to rethink their policy about offering 0% APR's. This strategy is excellent if you only have a year left to pay off your car, because many 0% APR offers are good for 12 months. Other wise this of more of a speculative venture.

This is unfortunate because you pay the most interest at the beginning of the loan when your balance remaining is highest. If you have room in your budget to add extra to your monthly car payments for a year, taking out a 0% APR balance transfer for the forecasted amount and paying that upfront will also yield a great reduction in interest paid over the life of the loan. The gamble here is that you will not need that extra money for an unexpected expense. This strategy works best if you have an emergency cash fund already that you can use as collateral (for yourself) for the loan. To see how adding extra payments could affect your car loan, check out the bankrate.com calculator.

For my bother it would be a big risk, but what about for me? If you look at my NetworthIQ page it shows that I only have about $4000 left on my car loan. That's easily payable in 12 months. The problem is my interest rate is pretty low for the loan and my monthly payments high, so I have only about $45 left to pay in interest. A $75 balance transfer fee would start me in the red on such a transaction. Even with putting the "car payments" I would make during that time in a savings account earning 3% my total would be just a skosh into the positive range. I don't think it's worth the hassle of opening up another line of credit. If I had seen the idea earlier it would have made better sense for me.

Conclusion: If you are prepared and get the timing right you can save quite a bit of money. If you are really bold, you could save a whole lot of money. Just hope that 0% APR's don't go the way of no income check /no down payment mortgage.