Personal Loan Strategy

[inquisitive]

I was on the phone with a credit card company today about an unrelated matter and at the end of the call the person offered that I could take a loan of up to $7000, pay 4% now, and have 0% interest until 2013. Is there a general strategy to use in this situation?

I declined it because I couldn't think of what would give me a guaranteed return more than that by the beginning of 2013 when I would have to pay it off or it jumps to a 12% interest rate or whatever. Now that I think about it, I have student loans with an interest rate close to 7% (now in deferment but the unsubsidized loans still accumulate interest). Would it be reasonable for me to take the $7000, pay toward student loans, and then pay off the $7000 credit card loan in January?

Are there any negative credit score implications that would make me not want to do this?

 

[pb4uski]

It depends. Are you sure you will have 7,000 in January 2014 (outside of a prudent emergency fund) to pay off the credit card? If so, then it might make sense.

The hitch would be if January 2013 comes along and you can't pay it off or refinance it at a lower rate then the rate jumps to 12% or more.

 

[MichaelB]

Generally speaking, it is not a good idea to owe money to a CC, because it has the highest interest rates. Every situation is different, and the small print always matters the most, but what CC have done in the past is lend the money at low rates but when you make new purchases, apply your monthly payments first to the loan, while the newly incurred debt racks up higher charges.

You absolutely need to see a fact sheet with all the terms before taking up an offer like this.

 

[Bestwifeever]

You would be paying a 4 percent fee to borrow money for less than 10 months it sounds like.

It sounds like the CC company just dangled this in front of you, you didn't go looking to borrow $7K.

I wouldn't do it.

 

[inquisitive]

I see what you are saying (to pb4uski). There are 2 possibilities:

1. I have $7000 now. Taking a loan for $7000 and paying it back next year would make 3% (loan fee 3% and student loans about 7%). This doesn't make sense because if I pay the $7000 with what I have now then I am saving 7%.
2. I don't have $7000 now. It would make sense to do it if I know that I would have $7000 extra come next year. But even this doesn't make sense because historically the stock market has returned close to 9% annually, although in the past 10 years it has been closer to 4%. So it probably doesn't make sense.

Good point about seeing the fine print, I didn't think about how it would be applied.

The only situation where I could see it could make sense is if I could get a CD or something, but I don't think I could get 4% so there's no point.

 

[muddy]

I think that another thing you should consider is that there are the benefits to having debt in student loan form (as opposed to a personal loan). Interest paid on student loans can be tax deductible and there are deferment options that I'd think you'd be giving up if you take a personal loan out to pay off the student loans. The only thing that I could see as a benefit to having the debt in non-student loan form (aside from potentially lower rate) is that student loan debt is not dischargeable in bankruptcy. But hopefully that's not an issue!

For your situation maybe none of those "benefits" will be taken advantage of, but something to consider.

I'm thinking about going back to grad school at some point and may need/want to defer my loans while back in school. So I'd be hesitant to do something like this, but everyone's situation is different. Best of luck.

 

[Finance Dave]

Another consideration would be the impact on your FICO score.

Also read all fine print....there's bound to be a "gotcha".

 

[FUEGO]

I have credit cards begging to give me hundreds of thousands at rates varying from 2% to 4% up front fee but 0% interest after that for periods of around 1 year. After that the rate jumps to 12+%.

So far I haven't figured out anything useful to do with this money for such a short period of time. My mortgage is fixed at 2.55% and my student loans are fixed at 0.75% (however I don't have to pay them now due to forebearance and then I enter income based repayment, the terms of which make it beneficial to pay as little as possible).

Back in the good ole days (of about 5 years ago) I could get around 5% interest on the money and I would be tempted to arbitrage against the 2% money. Can't get quite that high of a rate today on zero risk investments.

 

[Finance Dave]

I have credit cards begging to give me hundreds of thousands at rates varying from 2% to 4% up front fee but 0% interest after that for periods of around 1 year. After that the rate jumps to 12+%.

So far I haven't figured out anything useful to do with this money for such a short period of time. My mortgage is fixed at 2.55% and my student loans are fixed at 0.75% (however I don't have to pay them now due to forebearance and then I enter income based repayment, the terms of which make it beneficial to pay as little as possible).

Back in the good ole days (of about 5 years ago) I could get around 5% interest on the money and I would be tempted to arbitrage against the 2% money. Can't get quite that high of a rate today on zero risk investments.

I'd turn it into $1 bills, pile it up on your bed, and jump in it...all while taking a video. Send it back to the bank all wrinkled.

 

[RetireBy90]

I took a deal like this a couple months ago. I had accumilated a $4K credit card bill paying for son's college tuition and some other expenses. I do this every 4-5 years.
I choose to pay it out of income as a self imposed penality. Paying it every month for 6 months helps to remind me what being stoopid is costing me.

Rather than pay the BofA CC, I took a transfer at 0% for 12 months, and paid 4% transfer fee and I'm paying it off in 6-7 months on a AAA visa. Keeps the card active, cause I never use it. I didn't get a new card when the last one expired, but they keep sending the offer with the checks. About 2 weeks after I did the transfer, I got new AAA cards. I won't use them now, but it is does help to have CC active when you need em.

I know no one on the board would do this, but I need a kick in the butt some times. Rather do it to myself than have someone else do it for me. My credo is what ever works for you.

 

[FUEGO]

I'd turn it into $1 bills, pile it up on your bed, and jump in it...all while taking a video. Send it back to the bank all wrinkled.

Not at a 2% fee up front!

 

[Finance Dave]

Not at a 2% fee up front!

Oops...I thought he meant 2% INTEREST at first..not a fee. My bad.

Bad Dave, Bad Dave.

 

[FUEGO]

Oops...I thought he meant 2% INTEREST at first..not a fee. My bad.

Bad Dave, Bad Dave.

2% up front, so the effective interest rate is actually a little higher than 2% interest.