I was considering a couple of options to consolidate/transfer some credit card debt that I need to pay off quickly. I did some math to compare two products and found the results suprising.
Using round numbers for simplicity; I have about $15k on a card that has been carrying a bit of a balance for a bit too long (oversight and laziness on my part - bad me). About $10k of this is a recent large purchase. But after that large purchase, and trying plan how long I'll take to pay that off, I realized I hadn't paid this balance to zero in a long time, and there were some items accruing interest from 6 months ago. So I'm going to pay it off with a transfer, and then pay that down over the next few months, maybe longer if I have a zero interest 14mo pay period..... or maybe not!
So I had two products easily and quickly available to me, to compare:
1) a traditional balance transfer that had 0% APR for 14 months, with a 5% transaction fee. That fee would be $750 on the $15k transfer.
2) a personal loan from the same credit card / bank of up to $40k at 6.98% which I could choose to amortize over 12, 24, or 36 months. I'd go with 12 for me, in this case.
Cost of loan #1 is easy: $750.
Cost of loan #2 using Excel ( =12*PMT(6.98%/12,12,PRIN)-PRIN ) turns out to be LESS than loan #1, at only $573! Or a total of about 3.8% of the principal.
So a flat 5% fee and zero accrued interest over 12 months costs MORE than 6.98% interest amortized across 12 months.
That's really counter-intuitive / surprising to me, and I'm not bad at math. Without doing the math I'd have thought the "0% APR" loan was cheaper than a ~7% APR loan. But for a "short" term loan, the net interest paid is much less than the APR would imply.
Now, I know there are cheaper balance transfer options out there with a transfer fee of 3% usually, which would then beat the personal loan option above. And I may not do either of these things, as I make enough money and can pay this debt off pretty quickly (6months or so). But property taxes are due, and xmas is coming and this large purchase just now made me consider my options.
Submitted October 20, 2022 at 09:45PM by seenhear https://ift.tt/XWIbym8
