Need help from someone smart about interest rates

[Skymonkey13 0]

Say you borroewd $10,000. from a Bank at 3.9%, and payed it off at the rate of $250. per month.

Now lets say you took a cash advance on a credit card for $10,000. for 3.9% until it was payed off, but instead of just paying the minimum you payed $250. per month.

My question is,
Would you wind up paying the same amount of interest either way.
Or do banks and Credit Card co. have different ways of applying interest rates?

I hope i have made myself understandable.
Thanks

[jessd 0]

I'm no interest rate genius - but, I believe it would depend on how the interest was compounded. I remember discussing this in college in a finance class.

"Life is not measured by the number of breaths we take, but by the moments that take our breath away..."

[boxingrrl 0]

Funny you should ask... I'm pulling my hair out in a finance class right now. I'm still a student, so proceed at your own risk. It is my understanding that:

You should check the terms of your credit card agreement for information re: the billing cycle. Some are 25, some 28, some 30 days. You should be able to find out the same info re: the bank loan, as well. Days in the billing cycle (and compounding of interest) make a difference in the effective interest rate.

Something else to consider is how the credit card co. will determine your minimum monthly payment. Some are more "generous" than others, while some may require that you pay that $250 (or more) as a minimum anyway on $10,000. Rather than dig through all of your paperwork, it might be just as easy to call customer service and ask.

I would start with those two tasks before trying to actually calculate the best deal.

Good luck!

Edited to add: Also ask-- or read carefully, to determine if there is a fee for the cash advance on your card. Sometimes they run special offers, but usually it's a one-time 2-5%. The bank may also have fees, so keep that in mind. Even at 2%, that's an extra $200 (almost a whole monthly payment extra) that you'd be borrowing.

[dterrick 0]

The difference on a one shot loan as you describe will be minimal if present at all. The keys to any equation are interest rate first, then the loan term, then the compounding style. Presuming you are going to take a $250 payment as a given interest rate becomes #1 priority.

I think that lately (at least in Canada) the Credit card companies are trying to buy back market share from people who consolidated their debts at the bank but still have decent credit. The advantage of the card "loan" over the conventional loan is that the card stays active can can be used for other purposes once your done with this payment.

Another option you might consider (if aplicable to you ) is a credit line secured against your home equity. I'm not sure if you'll do much better than 3.9% but it's worth a look.

Dave T

Life is very short and there's no time for fussing and fighting my friend (Lennon/McCartney)

[Gawain 0]

If you borrow $10K from a bank, at a fixed rate, for a fixed period of time, then the bank can tell you how they load the interest vs. principal.

At 3.9% and $10,000, 48 months, your payment would be about $225.00 per month.

Credit cards are completely different, because it's a revolving line, with minimum payments being mostly interest which is compounded daily. Plus, they can change the rate. But you also have to ability to roll the principal from card to card as lower interest rates would be available.

In short, you are far better off with a signature type loan from a bank (the first example), however, getting that much money unsecured at a rate of 3.9% will require extremely good credit rating I think. Most loans of that type have interest rates over 8%.

Just my opinion.

So I try and I scream and I beg and I sigh
Just to prove I'm alive, and it's alright
'Cause tonight there's a way I'll make light of my treacherous life
Make light!

[Skymonkey13 0]

Thank you everyone.

[jkm2500 0]

The answer to your question is that you will pay more money through the credit card company. 1st, they have what is called compound interest. 2nd some credit cards deal in two cycle billing(discover). 3rd the payoff is scheduled around a 7 year amortization, which changes every time you pay off a percentage of the balance(thus the low payments). The credit card companies make their money through compund interest, usually compounded monthly. So whatever the balance is the interest is figured from there. When you make your payment, you will pay the interest portion first, principle second. That is why you can litterally never pay off a credit card.

With a bank it is different. But, it has to be a "secured" loan, or a loan that carries collateral. By doing that you will carry a simple interest loan. Which means that the interest is figured into payments over a set term. Therefore, you will know ahead of time(when you sign the contract) how much interest you will be paying throughout the term of the loan. The loan officer will have to go over a line in the contract that says how much you are borrowing, how much interest you will pay, what your payment is, and the total loan including interest. That is called customer rights, according to TX law those things have to be disclosed on every retail contract.

I hope that this answers your question. If you are considering an unsecured line of credit through the bank we are talking a whole new bird.

The primary purpose of the Armed Forces is to prepare for and to prevail in combat should the need arise.

[benny 0]

Note, you'll also serve yourself better if you make 2 monthly payments of $125, rather than 1 lump sum of $250

Never go to a DZ strip show.

[nitrodan 0]

Ask if the loan is compound interest, simple interest or a rule of 78s. Rule of 78s loan make you pay more interest during the first years of your loan so stay away from them. most of your normal bank loans will be simple interest with no early payoff penalty or fee this is what you want, the faster you pay it off the less interest you will pay. I'm a finance manager at a Ford dealer if you need to know anything else PM me and I'll be glad to help.

DAN SMITH
www.skydivewichita.com

[kallend 2,146]

Quote

That is why you can litterally never pay off a credit card.

Untrue.

I pay off my credit card each month, never have to pay interest.

...

The only sure way to survive a canopy collision is not to have one.

[jkm2500 0]

Quote

Untrue.

I pay off my credit card each month, never have to pay interest.

I see your point, and I guess that I should clarify. If you carry a balance, and make minimum payments you will never pay it off(paying the minimums). Because they adjust the amortization every time a certain percentage of the principle is paid off. That is why if you have a balance on a CC it is best to pay more than the minimum. Like I said in my earlier post the CC companies figure around a 7 year amortization. If you pay on your card for a year, then they decide that you have paid down enough principle, they will figure the amortization again on a new 7 years. Does that make sense?

The way to get around paying interest on a CC is to pay off the balance while still in the grace period.

Better?

The primary purpose of the Armed Forces is to prepare for and to prevail in combat should the need arise.

[Snowwhite 0]

One additional piece of important information here is what each type of loan does to your credit. When you go to buy a big piece of debt, a building, a business, car, school loans, etc. The bank doing the lending looks not only at what you owe, but what you have available in additional credit. A revolving loan is considered a bad loan, since you may not owe much on the loan, but you have the chance to encumber X amount of addtional debt. X is whatever the available balance is on the card(s). They may tell you that you don't qualify for the loan based on what you CAN owe, not what you DO owe.

skydiveTaylorville.org
freefallbeth@yahoo.com

[slug 1]

IMO a 3.9% CC rate is what is called in the industry a "teaser rate". Read the fine print in the contract.

Example Home depot 0% interest as long as you pay off the loan in 12 month's. Fine print says if the balance is paid in full in the 12 month's you will incure 18% interest from date of purchase on total amount charged (not outstanding balance).

Want to jump from one teaser rate to another? That only works if you can find a teaser that will accept your business. But they can see the writing on the wall your bouncing from one CC company to another.

Talked with a car dealer buddy who was recently assigned finance duties. I asked him the max he got in the last couple of month's for financing a car 21%. The folks had bad credit so they had to pay a little extra due to the risk.

If you have a credit union at work I'd start there. No rule of 78's, auto pay from you paycheck etc.

Also check out Bankrate.com they tabulate loan rates all over the country and have 800 phone #'s you can call.

Beware Read and understand your contract. There's no santa clause. If someone is has a very low rate there's a reason.

R.I.P.

[jkm2500 0]

Its good that you brought this up. However most banks only look at your debt-to-income ratio. What you have out in loans(secured and unsecured) and what you make. The amount of credit doesn't come into play unless you are close to being at that particular banks prescribed DTI ratio.

Other things that banks really take into consideration when you start talking about financing is work history, payment history, and how much you carry on credit. It shows a pattern as far as spending habits. Most car dealers use a computerized system that will "auto-approve" certain individuals loans, and auto reject others. I always loved when people would show up with a 700+ beacon score, made a decent wage, and wanted to buy a car. I had no problems getting their deals bought. The ones that I had troubles with are the ones that have 600-650 beacon score. Those people are the ones who tend to live right on the edge of their envelope. They usually had a problem with DTI.

CC companies usually dont take into consideration a lot of the above stipulations. They are driven more to find the people who can barely survive from paycheck to paycheck. They make the most money off of these people because they cannot pay the balance during the grace period, and immediatly start racking up finance charges. The CC companies continue to feed off of these people after that first month because they can only pay the minimum payments or a little above. Therefore they are able to consider that person a higher risk and then charge higher interest rates.

The primary purpose of the Armed Forces is to prepare for and to prevail in combat should the need arise.