Moving loan to CC, worth doing or not?

almostthere1984

Hi all, I've currently got a loan with 4 years remaining, balance of around 18k, 5.9% paying £420 a month. I've got a credit card that has a high enough limit I could do a money transfer from, and the current offer is 18 months interest free with a 3.5% fee. Is it a bad idea to shift it across? I worked out the fee will cost me about £800, but I'm thinking if I paid the same amount monthly to the CC I could clear it sooner. Any suggestions?

secla

Are you able to clear it by the time the 0% offer runs out ? No guarantee what cards will be available if you need to transfer again

redux

I'm looking at your comment about paying about the same amount per month. Did you mean the £420 or the £800? If you're hoping the same £420 you might be disappointed as you would need to accelerate the repayments to clear it in 18 instead of 48 months.

It would obviously save some interest if you can stick to it and pay it all off in that shorter time - at about £1000 a month - or if not you'd be looking around for a new transfer to follow on from that one, and that may or may not be tricky, and making you nervous as the deadline comes up

So it depends on your confidence and ability to speed up that much.

How about doing part of it, maybe a fifth or so, and see how it goes, then if that works out ok do another to transfer a bit more to the card a bit later? That would spread the time and risk.

Edit: don't consider this if you're also doing regular spending on the same card, as most cards would then be charging interest at full rate on the spending until you'd cleared that part of the balance

In the current climate 5.9% isn't such a terrible rate though.

Instead of this transfer plan and its risks, and more simply, you could just start making extra payments to the loan when you can afford to do so.

Ryan_Holden

Is your loan actually accruing interest though? It may already have been applied making this course of action pointless.

All 3 of the loans I've had have just had the interest calculated at the beginning and stuck onto the loan amount at the start, e.g. borrowed £10k and the balance to settle was £10,500 or similar.

CliveOfIndia

Ryan_Holden said:

Is your loan actually accruing interest though? It may already have been applied making this course of action pointless.

All 3 of the loans I've had have just had the interest calculated at the beginning and stuck onto the loan amount at the start, e.g. borrowed £10k and the balance to settle was £10,500 or similar.

Sorry to disagree, but you're wrong on that point.  Front-loading of interest has been illegal for many years now.

Interest is calculated on the outstanding balance on a daily basis.  At the start of the loan, most of your payments go towards interest, with only a small amount paying off some of the capital (there's a lot of interest because there's a lot of capital).  But as the loan progresses and you chip away at more of the capital, the amount of interest drops and more of your payments go towards clearing the capital.

But if you settle any loan early you will save interest overall - although they are allowed to charge an early settlement penalty.

Ryan_Holden

CliveOfIndia said:

Ryan_Holden said:

Is your loan actually accruing interest though? It may already have been applied making this course of action pointless.

All 3 of the loans I've had have just had the interest calculated at the beginning and stuck onto the loan amount at the start, e.g. borrowed £10k and the balance to settle was £10,500 or similar.

Sorry to disagree, but you're wrong on that point.  Front-loading of interest has been illegal for many years now.

Interest is calculated on the outstanding balance on a daily basis.  At the start of the loan, most of your payments go towards interest, with only a small amount paying off some of the capital (there's a lot of interest because there's a lot of capital).  But as the loan progresses and you chip away at more of the capital, the amount of interest drops and more of your payments go towards clearing the capital.

But if you settle any loan early you will save interest overall - although they are allowed to charge an early settlement penalty.

Illegal? Really? 

I haven't had a loan for about 5 years (I think) but I am positive that the interest was just calculated and added to the balance at the beginning. The loan calculators I've just played with also don't suggest anything about being calculated daily.

Granted the settlement figure was always mildly less than that, but I definitely remember there being the predicted interest applied at the start.

Happy to hush if I'm wrong or misunderstanding.

CliveOfIndia

Ryan_Holden said:

CliveOfIndia said:

Ryan_Holden said:

Is your loan actually accruing interest though? It may already have been applied making this course of action pointless.

All 3 of the loans I've had have just had the interest calculated at the beginning and stuck onto the loan amount at the start, e.g. borrowed £10k and the balance to settle was £10,500 or similar.

Sorry to disagree, but you're wrong on that point.  Front-loading of interest has been illegal for many years now.

Interest is calculated on the outstanding balance on a daily basis.  At the start of the loan, most of your payments go towards interest, with only a small amount paying off some of the capital (there's a lot of interest because there's a lot of capital).  But as the loan progresses and you chip away at more of the capital, the amount of interest drops and more of your payments go towards clearing the capital.

But if you settle any loan early you will save interest overall - although they are allowed to charge an early settlement penalty.

Illegal? Really?

Yes, it was made illegal (at least in the UK) some years ago.

Ryan_Holden said:

CliveOfIndia said:

Ryan_Holden said:

Is your loan actually accruing interest though? It may already have been applied making this course of action pointless.

All 3 of the loans I've had have just had the interest calculated at the beginning and stuck onto the loan amount at the start, e.g. borrowed £10k and the balance to settle was £10,500 or similar.

Sorry to disagree, but you're wrong on that point.  Front-loading of interest has been illegal for many years now.

Interest is calculated on the outstanding balance on a daily basis.  At the start of the loan, most of your payments go towards interest, with only a small amount paying off some of the capital (there's a lot of interest because there's a lot of capital).  But as the loan progresses and you chip away at more of the capital, the amount of interest drops and more of your payments go towards clearing the capital.

But if you settle any loan early you will save interest overall - although they are allowed to charge an early settlement penalty.

The loan calculators I've just played with also don't suggest anything about being calculated daily.

Granted the settlement figure was always mildly less than that, but I definitely remember there being the predicted interest applied at the start.

Any illustrative figures are based on the assumption that the loan goes to full term.  For example, if you borrow £10,000 over 3 years, the total amount repayable is £10, 950 (or whatever) - £10,000 to repay the capital, plus £950 in interest.  But yes, interest is calculated daily, so if you repay the loan early then you pay less interest.

redux

Ryan_Holden said:

Illegal? Really? 

I haven't had a loan for about 5 years (I think) but I am positive that the interest was just calculated and added to the balance at the beginning. The loan calculators I've just played with also don't suggest anything about being calculated daily.

Granted the settlement figure was always mildly less than that, but I definitely remember there being the predicted interest applied at the start.

Happy to hush if I'm wrong or misunderstanding.

You may have found predictions that tell you the interest added and total amount repayable if it goes to full term, but that does not mean the first statement will show this larger figure as the balance

To take the OP's example as described, if those were exact figures, an £18,000 loan with 48 months at 5.9% will have a monthly repayment of £421.91. In the next month that would consist of £88.50 interest and £333.41 principal, and the balance remaining would be £17666.59 (i.e. not £19918.07)

Nebulous2

Ryan_Holden said:

Is your loan actually accruing interest though? It may already have been applied making this course of action pointless.

All 3 of the loans I've had have just had the interest calculated at the beginning and stuck onto the loan amount at the start, e.g. borrowed £10k and the balance to settle was £10,500 or similar.

Lenders tend to report loans in two different ways. 

1. Add up all the payments for the whole term and give you that as the outstanding figure, then deduct each monthly payment so the total goes down.

2. Report the amount borrowed, add interest each month and deduct payments made, so the total goes down. 

Either way if you pay off early you pay less than you would going to term. The first way they calculate a discount from the total to give you a settlement figure by removing the future interest. The second way they never add the future interest on, and you pay off the balance. Lenders for personal loans can charge two months interest on any amount repaid, but they don't all do this. Even if they do, if the loan has a long way to run, you'll still be better off. 

Both ways give the same result, interest is calculated daily and early repayment reduces your costs. It simply serves to confuse people who may be used to one method and then are presented with the other one. 

almostthere1984

Sorry not responding to the comments, to clarify on the above the interest is added on monthly and is circa £90-£100, so when I make payments it shows on the statement the full payment and obviously the balance increases by the interest added each month. I'd love to be able to clear it in 18 months but don't think I can spare £1000 each month.

I've got a few credit cards with no balance, and very high credit limits, 20-25k and they give me balance transfer offers every month and have done for years, so I wouldn't be too worried about shifting the balance in 18 months.

secla

Think you would have to sit down and work it out then as balance transfers and cash advances carry a feee. usually around 3-4% so each time you make a transfer your adding extra to the amount. it may work out negligible over the full term