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Be careful with balance transfers. At 18 months, a 3% fee is like a 3.75% APR. If the balance transfer is only 12 months, it's about 5.5%. Still a lot better

Be careful with balance transfers. At 18 months, a 3% fee is like a 3.75% APR. If the balance transfer is only 12 months, it's about 5.5%. Still a lot better than a subprime installment loan, but a 3% fee is not a 3% APR.

basch 7y ago
But minimum payments are super low, so you can store the cash somewhere high interest and pay most of it back in a lump sum. If cash is 2% right now, your minimums might be $90-100ish a month, and the rest can wait till month 12. Theres little to no incentive to pay it off early except to lower your utilization. A 10,000 3% loan over the course of one year equal payments has $147.00 interest. A 3% transfer has $300, but your balance in month 12 will be 8846, which is like $80 back in interest if you save those what would be monthly payments until the end. Under this math, a 3% balance transfer is equivalent to 4.5% APR one year loan.
- p1mrx 7y ago
  I don't think there are any savings accounts with >= 3% APY right now. How could it ever be profitable to borrow money at a higher interest rate than you earn by holding it? Or, if "somewhere high interest" refers to the stock market, then you risk not being able to pay back the loan in a year.
  - basch 7y ago
    A balance transfer is a one time fee, not compounded monthly or daily. You pay 3% up front, and then theres no benefit to paying the loan off early, except for holding a lower credit card balance. What I am saying is, is that IF you are taking a balance transfer, to accurately compare it to a traditional, monthly compounded loan, you need to account for the minimum payment differences (the balance transfer will be 5x-10x lower) and then calculate the interest that extra cash not paid back to the loan can net you. I am making a counter argument to the claim that a 3% balance transfer is equal to a 5.5% apr loan, i think its closer to 4.5% if managed wisely. Its closer to 50% higher, not double.
    - rootusrootus 7y ago
      This is why I said "be careful" ;-). Someone who thinks that a balance transfer offer is easy math may not be making the best financial choice. As you point out, managed carefully, that can be mitigated.
tempsy 7y ago
Not sure what you mean by "be careful." That is an extremely cheap loan by any measure.
- cascom 7y ago
  Not if they were only borrowing for 1-month - then the annual rate would be closer to 43%
gruez 7y ago
> At 18 months, a 3% fee is like a 3.75% APR. If the balance transfer is only 12 months, it's about 5.5%. How are you getting those numbers? I used an online APR calculator and for 12 months, the APR is 3.057%, nowhere near 5.5% you claim. https://www.calculator.net/apr-calculator.html?cloanamount=100&cloanterm=1&cloantermmonth=0&cinterestrate=0&ccompound=monthly&cpayback=year&cloanedfees=0&cfrontfees=3&type=1&x=68&y=28#generalapr https://www.calculator.net/apr-calculator.html?cloanamount=1...
- gnopgnip 7y ago
  Because the fee is paid upfront, and this is assuming you make equal payments each month for 12 or 18 months. Compared with a loan that charged normal interest it would only accrue on the current balance, and the interest you pay each month goes down as the principal goes down. If you had a 12 month balance transfer and made only minimum payments, then paid off the lump sum at the end it would be lower APR.

basch 7y ago

But minimum payments are super low, so you can store the cash somewhere high interest and pay most of it back in a lump sum. If cash is 2% right now, your minimums might be $90-100ish a month, and the rest can wait till month 12. Theres little to no incentive to pay it off early except to lower your utilization. A 10,000 3% loan over the course of one year equal payments has $147.00 interest. A 3% transfer has $300, but your balance in month 12 will be 8846, which is like $80 back in interest if you save those what would be monthly payments until the end. Under this math, a 3% balance transfer is equivalent to 4.5% APR one year loan.

p1mrx 7y ago
I don't think there are any savings accounts with >= 3% APY right now. How could it ever be profitable to borrow money at a higher interest rate than you earn by holding it? Or, if "somewhere high interest" refers to the stock market, then you risk not being able to pay back the loan in a year.
- basch 7y ago
  A balance transfer is a one time fee, not compounded monthly or daily. You pay 3% up front, and then theres no benefit to paying the loan off early, except for holding a lower credit card balance. What I am saying is, is that IF you are taking a balance transfer, to accurately compare it to a traditional, monthly compounded loan, you need to account for the minimum payment differences (the balance transfer will be 5x-10x lower) and then calculate the interest that extra cash not paid back to the loan can net you. I am making a counter argument to the claim that a 3% balance transfer is equal to a 5.5% apr loan, i think its closer to 4.5% if managed wisely. Its closer to 50% higher, not double.
  - rootusrootus 7y ago
    This is why I said "be careful" ;-). Someone who thinks that a balance transfer offer is easy math may not be making the best financial choice. As you point out, managed carefully, that can be mitigated.

tempsy 7y ago

Not sure what you mean by "be careful." That is an extremely cheap loan by any measure.

cascom 7y ago
Not if they were only borrowing for 1-month - then the annual rate would be closer to 43%

gruez 7y ago

> At 18 months, a 3% fee is like a 3.75% APR. If the balance transfer is only 12 months, it's about 5.5%. How are you getting those numbers? I used an online APR calculator and for 12 months, the APR is 3.057%, nowhere near 5.5% you claim. https://www.calculator.net/apr-calculator.html?cloanamount=100&cloanterm=1&cloantermmonth=0&cinterestrate=0&ccompound=monthly&cpayback=year&cloanedfees=0&cfrontfees=3&type=1&x=68&y=28#generalapr https://www.calculator.net/apr-calculator.html?cloanamount=1...

gnopgnip 7y ago
Because the fee is paid upfront, and this is assuming you make equal payments each month for 12 or 18 months. Compared with a loan that charged normal interest it would only accrue on the current balance, and the interest you pay each month goes down as the principal goes down. If you had a 12 month balance transfer and made only minimum payments, then paid off the lump sum at the end it would be lower APR.