For anyone struggling to get rid of quick cash loans, a 0% APR balance transfer offer can look like a godsend. If one creditor is ripping you off, you may be tempted to race to the seemingly safe embrace of another. After all, the new guy promises to behave, in writing, for a set time period.
But, if you’re a reckless spender, balance transfers are dangerous. They’re another opportunity for you to fall deeper in debt.
Although many credit card companies provide great value to their customers, many don’t, so proceed cautiously when doing business with issuers.
With that said, in some cases, a balance transfer makes sense.
For instance, you can quickly and easily refinance your auto loan by paying off the remaining principal with a balance transfer.
First, determine whether transferring the balance saves you money.
Then, decide whether the potential savings are worth the risk.
What to Consider When Refinancing an Auto Loan with a Balance Transfer
Several factors make up a balance transfer offer:
- Intro (Teaser) Rate - Below market interest rate used by credit card companies to reel in new customers
- Promotional Period - Length of time the teaser rate applies to a balance transfer
- Transfer Fee – Another term for upfront interest that’s charged on the amount transferred. (For example, a 3% transfer fee on a $1,000 balance transfer is $30.)
- Annual Fee – Another fee that will sour a balance transfer offer . . . real quick
- Normal Rate – Interest due on unpaid balance after promo period ends
How to Calculate the Savings
All balance transfers are not created equally. A little math will show you which ones are a good deal.
Let’s assume you have eighteen months and $5,000 left on a 10% auto loan. If you don’t refinance, you’ll pay $400 in interest over the remaining term. (You should be able to get this information from your lender.)
Below are examples of what a bad balance transfer and okay balance transfer would look like.
So that you’re not stuck with a high interest rate, use a Credit Card Calculator to figure out the monthly amount required to pay off the balance transfer before the promotional period ends. OR you could continue paying an amount equal to your car note.
In the event the teaser rate on your balance transfer isn’t 0%, a Loan Amortization Calculator will show you how much interest you’ll pay on the balance transfer.
If none of your existing creditors have an acceptable offer, check out websites such as CardRatings or Bankrate.com.
Your mailbox isn’t bursting with sweet ass credit card deals because Citibank and Bank of America wanna impress yo’ mama.
What if you don’t pay off the transferred balance before the promo period ends?
Whether interest rates drop or hold steady, the normal APR on your card could skyrocket. Excluding the promo period, credit card companies can change the interest rate they charge you, pretty much, when they feel like it with little notice. If that happens, maybe you’ll be able to take advantage of another balance transfer. Then again, maybe not.
What if you pay your credit card bill late?
You may end up losing money. There’s a good chance you’ll get stuck paying the default interest rate, which goes as high as 30% on many credit cards. Avoid this trap by setting up automatic payments.
After running the numbers, $400 may not be enough to justify the amount of risk a balance transfer requires you to take.
And $42 DAMN sho ain’t worth it.
Standard Auto Loan Refinancing
Balance transfer teaser rates, generally, don’t last longer than eighteen months. Not only will you get a fixed rate, but with traditional refinancing, you have more control over the new loan’s term. Currently, PenFed Credit Union refinances auto loans for as little as 1.99%.
What if you’re happy with your car loan interest rate, and you don’t want to refinance? You can still pay your loan off faster and save money on interest by sending your lender bi-weekly payments.
Keep in Mind
Ultimately, if you choose the “balance transfer” path to auto loan refinancing, don’t cancel the new credit card once it’s paid off. Remember, your credit score could take a hit in a couple of ways: 1) cancelling a credit card will increase your credit utilization ratio and 2) the brief account activity will shorten the length of your credit history.
Have you ever refinanced an auto loan with a balance transfer? Do you think it was a good financial move?