Charge It!

Inquiring minds have been asking whether customers can charge the down payment for their new car to a credit card. The answer, like so many others, is “it depends.”

There is no federal law that I’m aware of that would prohibit using a credit card for this purpose. Arguably, the fact that the down payment is made on credit (the credit card) at the same time the customer is signing a retail installment sale contract (RISC) could give rise to an argument that the Truth in Lending disclosures on the RISC are incorrect, but I think that’s a stretch. State law may have something to say about the practice, so it wouldn’t be a bad idea to check with your local counsel to see if you state imposes any restrictions or prohibitions.

Generally, however, accepting a down payment on a credit card is a bad economic deal for the dealer. They have to pay the usual bank fees and interchange fees every time they accept a card, and those fees can severely eat into already razor-thin margins. This is true even if you limit the amount of down payment that can be charged. Furthermore, you have the risk that the customer will dispute the charge, particularly if they are not happy with their vehicle and you have not managed the customer appropriately. That can mean months of holdbacks by the card issuer.

Dealers also need to be concerned about their obligations under their agreements with their finance sources. Virtually every dealer agreement I’ve ever seen contains a representation by the dealer that no part of the down payment was made with a loan or other credit instrument. When the customer stops paying on the RISC because he’s drowning in credit card debt, your finance source may be inclined to suggest that you’re in material breach of the dealer agreement.



The other thing to check is whether your merchant agreements with the card issuers permit the card to be used for this purpose. I recall there was a time when one could not make a debt payment on a credit card (we all know those days have passed), but it’s a good idea to check out your obligations under the merchant agreements.

At the end of the day, most dealers are going to want to balance their need to move the metal with the economic costs of permitting credit card down payments. A discussion with your local counsel could put to bed (or not) any legal concerns. Once you’re comfortable with whether you’re on solid legal ground, look at what your contractual limitations are. If you can get over that hurdle, look at the economic impact of a credit card down payment on your bottom line. Then you’ll have an answer.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. Michael can be reached at 202-327-9705 or mbenoit@hudco.com. Nothing in this article is legal advice and should not be taken as such. Please address all legal questions to your counsel.

Michael Benoit

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