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Balance transfer or loan? Do the math before you decide

By Alan Klayman

Maturing Loans
Maturing Loans, Alan Klayman
Alan Klayman is CEO of Klayman Financial LLC. He served as a vice president at Fidelity Investments, worked as a financial planner for American Express, and built fixed income strategies on Wall Street at The First Boston Corporation. At, he writes Maturing Loans, a weekly feature in which he answers readers' questions about retirement and debt issues.

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Question for the expert

Dear Maturing Loans,
I receive many offers for credit cards, but my question is this: What's a better deal -- a low introductory interest rate balance transfer card or a simple loan? I have a balance of $5,000 and have received the following offers: a card with a 0 percent interest rate for six months on balance transfers, a 3 percent transaction fee and a 9.9 percent interest rate after six months; or a loan with a 3.99 percent interest rate for its life and a 3 percent transaction fee. -- Rivets

Answer for the expert

Dear Rivets,
You have asked a good question -- and an important one for many people.  Let's take a look.

First, a 3 percent transaction fee on a $5,000 balance transfer would equal $150.

In comparing these scenarios, we will assume you keep the balance the same -- at $5,000 -- and you pay down the interest cost. This way, we are not calculating interest on interest.

Scenario 1: A credit card with a 3 percent transaction fee plus a 0 percent introductory APR for six months on a balance transfer plus a 9.9 percent interest rate after six months  
In this scenario, you would pay the aforementioned $150 transaction fee but no interest on the transfer itself for six months. Then, the 9.9 percent annual percentage rate would kick in. Assuming the $5,000 balance total, you would generate $247.50 in interest over 6 months.

That means that for the first year that you have the credit card, it would cost you $397.50 -- the $150 transaction fee + $247.50 in interest.

In the second year and every year thereafter, you would be charged $495 (9.9 percent interest times $5,000) in interest, noncompounding for the year.

Scenario 2: A loan with a 3 percent transaction fee and a 3.99 percent APR
In this scenario, you would pay a $150 transaction fee plus $199.50 (3.99 percent APR times $5,000) in noncompounding interest. That means that for the first year, you'd be charged $349.50.

In the second year and every year thereafter, you would be charged $199.50 (again, 3.99 percent APR times $5,000).

So which is best?
Given all of this, what's the answer to your question? It depends on how long it takes you to pay off your loan. The longer you go, the better Scenario 2 (at 3.99 percent APR) looks versus the 9.99 percent APR in Scenario 1.

  • Scenario 1 total cost for first year = $397.50.
  • Scenario 2 total cost for first year = $349.50.
  • Scenario 1 total cost for first two years = $397.50 (first year) + $495 (second year) = $892.50.
  • Scenario 2 total cost for first two years = $349.50 (first year) + $199.50 (second year) = $549.00.

You are better off in Scenario 1 only if you hold the loan for less than 10 months.  

  • Scenario 1 total cost for 10 months: $150 + $0 for six months + $41.25/month for four months = $315.
  • Scenario 2 total cost for 10 months: $150 + $16.63/month for 10 months = $316.30.

Still, no matter which you choose, please try to pay down the debt as time goes by and keep your interest costs down.

Thanks for the question, see you back here next week.

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Alan Klayman is creator of and CEO of Klayman Financial LLC. Klayman specializes in retirement income planning, business management and planning, estate planning, tax-advantaged investing, trust investment management, professional money management, insurance and annuities, mutual funds, fixed income securities, and institutional and personal retirement plan administration.

Published: October 1, 2008

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Updated: 03-27-2015

National Average 14.90%
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Student 13.14%
Balance Transfer 14.04%
Reward 15.04%
Airline 15.10%
Cash Back 15.28%
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