Credit card payments query

B_Real_2

I've been offered a balance transfer at 3.94% p.a for the life of the balance (+3% fee). I have £5000 to transfer.

I'm not sure if this is a better deal than just getting a loan from say Zopa at 7.9%. My head says of course but my nerves say check the numbers. This is what I need help with! I'm not sure how to calculate the total costs of loan v total cost of balance transfer.

If I transfer £5000 at 3% fee, my balance on new card is £5150. This makes my first monthly payment of 3.94% £202.91. This then reduces my balance to £4947.09. Month 2 is then 3.94% of £4947 = £194, which then reduces my balance to £4752, and so on. Is this how it works?

I feel like Im missing a step in my calculations.

splatt30

I'm not brilliant at these myself, BUT I do know that the 3.94% on you balance transfer has nothing to do with the amount you pay each month.

I think it works like this. If the debt stays the same for 12 months you pay 3.94% interest (ie on £5150 that would be £202.91 interest). So in 12 months you pay approx £352 interest.

On the loan in 12 months you'd pay £395 interest.

Clearly these figures change depending on how much you clear each month and how long you take to clear the debt. As I say I'm not a financier but this is how I understand it. Route around the credit card and loan pages on here and you'll probably find better explanations.

B_Real_2

Ah ok, that makes a bit more sense. In fact, i've found an online calculator (from a competitors site that will remain nameless :-) ) that does all the maths for you, so:

£5150 at 3.94% paid off over 3 years will take monthly payments of: £151.91. This will cost a total of £5,468.76.

or if I get best interest rate on a loan:

£5150 at 7.9% paid off over 3 years will take monthly payments of: £160.54. This will cost a total of £5,898.

If I look at the figures alone, thats a no brainer, balance transfer at 3.94% wins. Of course, if i get a loan that allows me to tart my credit cards down the line ;-)

Any financial experts willing to back up my line of thinking?

thriftymomma

Your line of thinking is correct. Go ahead and transfer!

splatt30

The maths say the credit card balance transfer is cheaper.
But beware, this will only work in your favour if you don't use the credit card for anything else. If you spend on it, and your APR for spending is say 15% nearly every card will allocate your payments to the cheaper debt first, which could mean in the long term your paying much more interest.

withabix

The balance transfer is cheaper IF you are going to pay the balance off without spending on the card.

Get the loan and cancel your credit card IF you aren't strict enough with yourself, otherwise you could end up with the loan and a maxxed-out credit card again!

B_Real_2

I have a 3rd credit card that I use for spending. The 3.94% card would be left WELL alone! I would set up a monthly direct debit from my current account to pay it off.

The benefit of a loan would be that I can extend the loan by say £1,000 and only pay an extra £20 or so a month on repayments, which I would hardly notice. I could then use this grand to go snowboarding in Jackson Hole next year :-)