Borrowing with 4.5% up front fee versus 6.4% ongoing

Pat38493

How should I weigh up which is better if I wanted to take some leverage on a short term basis between a 4.5% up front fee via a cash transfer card, versus a standard personal loan at 6.4%?

Is it a simple matter that the 4.5% is better unless I am planning to pay it off very quickly within the first year?

(I would generally be using this simply to transfer some cash flow into the following tax year for tax reasons).

Nasqueron

If both options give you the money you need, logically the lower interest one is better, regardless of how fast you pay it off

Pat38493

Nasqueron said:

If both options give you the money you need, logically the lower interest one is better, regardless of how fast you pay it off

Yeah but I was just wondering, since the 4.5% fee on the card is effectively charged up front, if I then paid all the money off 3 days later, I would still have to pay the 4.5% fee on the full amount.  With a normal loan, if I paid it off after a month, I would only pay 1 month of interest.

I would assume that on the credit card the 4.5% fee is added to the balance and forms part of the minimum payment during the agreed period, so it's not coming immediately out of my bank account.

Nasqueron

Pat38493 said:

Nasqueron said:

If both options give you the money you need, logically the lower interest one is better, regardless of how fast you pay it off

Yeah but I was just wondering, since the 4.5% fee on the card is effectively charged up front, if I then paid all the money off 3 days later, I would still have to pay the 4.5% fee on the full amount.  With a normal loan, if I paid it off after a month, I would only pay 1 month of interest.

I would assume that on the credit card the 4.5% fee is added to the balance and forms part of the minimum payment during the agreed period, so it's not coming immediately out of my bank account.

That is correct but the loan may well have early redemption charges / minimum number of months fee to be paid - you'd have to check the terms

Pat38493

Nasqueron said:

Pat38493 said:

Nasqueron said:

If both options give you the money you need, logically the lower interest one is better, regardless of how fast you pay it off

Yeah but I was just wondering, since the 4.5% fee on the card is effectively charged up front, if I then paid all the money off 3 days later, I would still have to pay the 4.5% fee on the full amount.  With a normal loan, if I paid it off after a month, I would only pay 1 month of interest.

I would assume that on the credit card the 4.5% fee is added to the balance and forms part of the minimum payment during the agreed period, so it's not coming immediately out of my bank account.

That is correct but the loan may well have early redemption charges / minimum number of months fee to be paid - you'd have to check the terms

Yes but according to what I was told on another thread, they are not legally allowed to charge more than 56 days interest for early settlement of a loan.

Nasqueron

Yeah typically effectively 2 months early redemption

So therefore do the sums of a BT (which will have the fee added to the balance but 0% interest) vs the loan + interest + early redemption fee and see if it makes sense given your desire to have cash for tax reasons 

MEM62

Pat38493 said:

Nasqueron said:

If both options give you the money you need, logically the lower interest one is better, regardless of how fast you pay it off

Yeah but I was just wondering, since the 4.5% fee on the card is effectively charged up front, if I then paid all the money off 3 days later, I would still have to pay the 4.5% fee on the full amount.  With a normal loan, if I paid it off after a month, I would only pay 1 month of interest.

You have summed up the options perfectly.  As for which is better, that will depend on how long you are planning to take to clear the debt and you have given no indication of that.  

Martico

Alternatively, you could go for the 4.5% upfront fee then dump it into a savings account and drip out the payments from there, making a bit of interest throughout the 0% period.

Herzlos

As you said it's just down to how quickly you pay the loan off. Assuming you clear it over the period the APR is about double the fee.

If you got the transfer for 12 months and paid 1/12th each month, the effective APR of the 4.5% is about 9%.

But if you weren't paying it down at all, it'd be 4.5%, with a sliding scale in between.

So unless you're planning on carrying the full balance onto another deal later, you're almost certainly better off taking the loan and paying 6.4% on the actual outstanding balance.

If you're planning on paying it off immediately in the tax year, then you may be better looking for a money transfer that charges based on the actual balance. My cards often offer both options.