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Let us say I have $10k in a high interest debt. Or even some money I need to borrow for expenses. I am unable to clear the $10k in one payment and so putting it on a credit card won't make sense. Overall goal: Minimize the overall interest/fee or payment on top of the borrowed principal.

In the last 3 years I had leveraged balance transfer offers (For ex, I had 2 credit card (call them C1 and C2) promos for 0% APR and 0% fee for 15-18 months. I had one for 1% transfer fee call this C3 and one for 4% transfer fee, call this C4).

For the C4 case I transferred $25k with a 18-month 0% APR offer at 4% fee. I cleared it all by 18 months and I was feeling proud of not having borrowed using a Personal Loan (most of which start at about 6%) because my goal was to pay the least interest on the overall debt.

Ever since, I have been defaulting to the balance transfer route when I needed money. I was recently trying to find formulas for calculating effective interest paid on personal loans to cross-check if my approach is right. I understand that usually balance transfer offers are under 18 months and so not all amounts can be managed this route.

So let me try an apples-to-apples comparison. If I have an offer for balance transfer with a fee of 4% for 18-months and on the other side I have a personal loan offer with APR of 4% for 18-months, which one should I take.

I referred to a formula in this answer - https://money.stackexchange.com/a/64675/80804 and put it in a spreadsheet. I was surprised to see that the interest paid on loans was less than the balance transfer fee.

Did I make a mistake in those past offers? And going forward, should I abandon Balance transfer options? Is the formula correct? Are these merely theoretical comparisons but not practical (for ex, I haven't seen 2% APR or loans with terms less than 2 years).

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Yes, over 18 months you'll pay slightly less interest (3.2% vs 4% by my calculations), so on $10,000 the difference will be about $80.

The breakeven point seems to be about 23 months. For shorter periods, you're better off paying the monthly interest since the balance declines as you pay down the debt.

That said, I'd be more concerned about why you're racking up tens of thousands of dollars in debt in the first place. Obviously, if you don't rack up lots of debt in the first place, you minimize the interest you pay.

  • sadly, circumstances is my best answer to that. I went from $20k in savings, $50k worth in stocks (from $30k investment and long term capital gain) to negative. Wedding, wife's medical expenses, wife's prior credit card debt, losses due to home repairs+sale. Things come up but are generally in control and I am about to go after her student loans now. That's why I am evaluating strategies. – perennial_noob May 24 at 23:28
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I have an offer for balance transfer with a fee of 4% for 18-months and on the other side I have a personal loan offer with APR of 4% for 18-months

The first is 4% per 1.5 years, and the second is 4% per year.

Thus, go with the first offer.

  • The second also has the same duration in my example comparison. Also, one time fee is calculated differently from APR on loans. Not sure it is that trivial. – perennial_noob May 24 at 23:25
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    The first is 4% per 1.5 years on the maximum balance, the second is 4% per year on the average balance. Thus, if the debt will be paid down (roughly) linearly, go with the second offer. The first offer is better only if the majority of the debt will be churned into another balance transfer instead of being paid off. – Ben Voigt May 25 at 18:35

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