How is 5.9% life of balance with 1.5% fee worse than a loan at 7.9%?

The_Boss

Hi all,

I have a loan with Tesco bank, £8.4k left in total with an APR of 7.9% that still has 3 and a half years to run

I can now afford to settle this within 18 months and had two ideas - one revolving around putting surplus funds into an ISA or doing a super balance transfer.

I saw the MBNA 5.9% for life of balance, with 1.5% fee and thought this would be the best way to proceed. I could then overpay every month and be reducing the debt owed, as opposed to overpaying on my loan which would just reduce the monthly payments until I could settle.

I took a look at the loan/credit card comparison tool on here, and it said that using the MBNA card in this way is the equivalent of a 8.6% APR loan over the 18 months that I intend paying it off. How does this work out? Surely it should equate to 7.4% over the life of the balance and then attract a lot less interest as I will be paying more off than I am currently (about £500-£600 a month til paid, as opposed to £208 a month for another 42 months).

opinions4u

Remember the 1.5% is an up front charge that then accrues interest itself over the term of the debt. Interest charges are spread over the term. If the 1.5% was charged across 12 months it would make the "real" APR 7.4% for a 12 month debt.

If you are borrowing shorter term, the "real" APR is higher on the card than the loan you reference because of the up front fee. Longer term it becomes lower.

I would probably choose the flexibility of the credit card if you have the intention of clearing it in 18 months. This is because I would have a greater flexibility around overpaying or underpaying.

udydudy

The reason the APR is equivalent to a 8.6% is that as you repay the principal amount of the loan towards the end of the loan is small but the costs of 1.5% is upfront and attracts interest(though miniscule) and is averaged over the whole 18 month period bringing the 5.9% to 8.6%

if your loan amount were constant and repaid at the end of the loan period of 18 month then your APR would have been 5.9% + 1% (i.e. 1.5% fee * 12/18) = 6.9%

Brighid

Hello

I also have a loan with tesco. They wrote to me this week saying they were changing their terms and conditions, allowing me to overpay on my loan. So maybe this is a standard change and you can pay off the debt quicker without having to move it?

B

Degenerate

Can someone take me through the maths in detail here, because I think I agree with the OP, I can't see how the loan beats the card even accounting for the extra interest on the front-loaded 1.5% fee.

The_Boss

Brighid wrote: »

Hello

I also have a loan with tesco. They wrote to me this week saying they were changing their terms and conditions, allowing me to overpay on my loan. So maybe this is a standard change and you can pay off the debt quicker without having to move it?

B

Thanks for this - I'm considering this approach if it's the best way of reducing interest payments on the loan.