To Charge or Not to Charge

Can you charge a customer’s down payment to a credit card? The magazine’s legal wiz says the answer has more to do with economics than the law of the land.

By Michael A. Benoit

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

There is no federal law I’m aware of that prohibits the use of a credit card for this purpose. Theoretically, if a down payment is made on a credit card and the customer also is signing a retail installment sales contract, it could give rise to an argument that the Truth in Lending Act disclosures on the RISC are incorrect. But I think that’s a stretch.

State laws 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 your state imposes any restrictions or prohibitions.

I know from personal experience that dealers are of two minds about the practice. About 10 years ago, I asked to put my own down payment on a credit card — after negotiating the price and the rate to rock bottom. I don’t think they were happy about it, but it was the only way the deal was going to get done, so they were willing to do it.

Normally, accepting a down payment on a credit card is a bad deal economically 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 a down payment that can be charged.

There’s also the possibility that the customer will dispute the charge, especially if they are not happy with the vehicle they purchased and if 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.

Dealers also should check whether their merchant agreements with the card issuers permit the card to be used for this purpose. There was a time when you couldn’t 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 potentially put any legal concerns to bed. Once you know 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. I’m sure that will provide you with the answer you’re looking for.

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. He can be reached at michael.benoit@bobit.com. Nothing in this article is legal advice and should not be taken as such.  Please address all legal questions to your counsel.