I can guess the answer to this question, but I can't figure out why. So here goes...
- I've got an unsecured line of credit with a limit $30,000.
- The annual interest rate is 6%, compounded daily.
- Every month, I am required to pay 3% of the balance as a "minimum payment".
- There are no transaction fees.
What prevents me from paying the "minimum payment" from my savings account, then immediately withdrawing that same amount from the line of credit back into the savings account? The net effect is that I'm not really making a payment, so clearly this can't be possible... I just don't understand how the bank would be able to differentiate between this scenario, and the scenario where I legitimately need to borrow more money shortly after paying the minimum payment.
What am I missing?
UPDATE: I get the importance of paying back loans and limiting what you borrow. This is purely a theoretical question about whether the "minimum payment" requirement has any practical impact, or whether it can be circumvented using this mechanism. It sounds like the bank is putting on a show of encouraging you to pay back the loan, while not actually doing so.