Are you looking to take out a loan? Given the current interest rate, it can be quite challenging to have a loan with an affordable monthly payment. I want to share some loan hacks you can leverage.
After finishing college, I took out a loan to purchase my first car, Jeep Patriot. Shortly following that, I started purchasing stuff using credit cards. A year later, I had quite a bit of money lended through a combination of credit cards and personal loans. I consolidated them to simplify the payment. However, I never realized that there were better approaches!
The answer to the situation is balance transfer.
Here are steps you can take to evaluate your current situation and preferred approach.
- Evaluate how much you owe
- Use a spreadsheet or similar to create a list of your loans and credit card balances.
- Understand interest rates
- Once you have the list, check an interest rate for each. For credit cards, it’s likely they have an interest rate higher than 10%.
- Calculate your monthly payment
- Check how much you are paying every month. This does not have to include how much you are paying towards interests. Just get a total of your monthly payment.
Once you analyze your current situation, let’s dive into balance transfer.
What’s balance transfer?
A balance transfer is a financial transaction in which you transfer the balance (or outstanding debt) from one credit card or loan account to another. The purpose of a balance transfer is to move your debt from a high-interest rate account to a lower interest rate account, thereby reducing the amount of interest you pay and potentially saving you money.
For example, if you have a credit card with a high-interest rate and a significant balance, you can transfer that balance to a new credit card with a lower interest rate. The new card will then take on the debt and you’ll make payments on the new card with the lower interest rate.
Balance transfers often come with an introductory period, during which the new card offers a low or 0% interest rate on the transferred balance for a set amount of time. This period can last for several months or up to a year or more, depending on the card issuer and their terms.
It’s important to note that balance transfers often come with fees, such as a balance transfer fee or an annual fee. You’ll want to weigh the potential savings from the lower interest rate against any fees associated with the transfer to determine whether it’s a good financial decision for you.
Does balance transfer make sense to you?
Let’s take a hypothetical scenario.
- You owe a total of $30,000 from multiple banks
- All loans have an interest rate of 15% (just for the sake of simplicity)
- Your monthly payment is $620, combined for all the loans
- The loan term is 6 years
In this scenario, you would be paying about $14,000 in interests. This means you are paying for a total of $44,000. Now you see why it takes so long to pay off your loan! Let’s compare that to balance transfer approach.
- Some balance transfer offer 0% interest free period of 12 month
- 5% of balance transfer fee
If you balance transfer the whole loan amount, $30,000, you pay for a one time balance transfer fee of $1,500. During the first year of your loan payment, you would be paying about $4,000 in interests. This is $2,500 more than the balance transfer fee.
Here are key considerations:
- With balance transfer, you pay a balance transfer fee. However, this is usually far less than what you would be paying in interests for your loans.
- With a single balance transfer, you can only transfer up to your credit limit. You will likely need multiple credit cards to do it for your full amount.
- Your credit score will get a hit because balance transfers come from your credit limit.
- If you are unable to pay off the whole amount in a year or during the interest free period, do a balance transfer again to another credit card. Some banks offer the same 0% interest free offer once you pay off the existing balance. So once you transfer from card A to card B, you can then do the same (card B to card A) after a year.
Hope you will be able to save money while borrowing money!