Question from Larry: I bought a new car a couple of years ago and I still owe almost $7,000 on it.
The interest rate I’m paying on that loan is 13.99% APR.
I just found out I can transfer $5,000 of that $7,000 balance onto a balance transfer credit card and pay no interest at all for the first year.
That sounds like a great deal to me and I’m seriously considering doing it.
Can you think of any pitfalls I need to be aware of before I make this deal?
Rick’s answer: That does sound like a great deal Larry, but you’re very wise to be cautious.
Truth be told, there are indeed a couple of possible pitfalls that you could encounter by moving $5,000 of your auto loan debt to a balance transfer credit card:
1 – While that 0% interest rate is awesome for the first year, you’ll immediately start paying the regular interest rate after the introductory rate expires.
You didn’t mention what the interest rate for this card will jump to at the end of the first year, but it could easily be anywhere between 20% and 30% APR. Ouch!!
2 – If you end up making even one late payment at any point during the first year introductory rate period, your interest rate will immediately jump from 0% to whatever the regular rate for that card happens to be (which could be almost double the 13.99% you’re paying now!).
What’s more, the terms for many balance transfer credit cards state that if you make a late payment during the introductory period the regular interest rate will go into effect retroactively to the day you transferred the balance.
That means if your 11th payment is late you could retroactively be charged the full interest rate for the 10 months in which you paid zero interest!
3 – Since you can only transfer $5,000 of the $7,000 you currently owe, that means you would end up with two payments to make every month instead of just one.
Is there room in your budget for making an extra payment every month?
If so, it might still be advantageous to move $5,000 of your car loan debt to the balance transfer credit card in order to save a year’s worth of interest on that part of the debt.
However, if you’re currently struggling to make your existing car payment every month, you’d probably be better off skipping this deal and just keep paying the 13.99% interest on the entire balance until the loan is paid off in full.
If you ultimately decide that this balance transfer deal is simply too risky for your comfort level, you might still have a couple of other options (depending on your credit score).
1 – You might be able to take out a personal loan for the entire payoff amount at less than the 13.99% interest you’re currently paying.
If you decide to go this route, the best place to inquire about getting a personal loan is the local bank you’re already doing business with.
2 – If you own your home you might qualify for a home equity loan that will allow you to borrow the entire payoff amount at a lower interest rate that the rate you’re paying on the auto loan.
Bottom line: Transferring a high interest auto loan to a balance transfer credit card with a 0% first year introductory rate could definitely save you some serious cash in the long run.
Just make sure your budget is capable of handling an extra monthly payment, and be extra diligent about making them on time.
Also, make you sure understand completely what will happen if you make a late payment during that first year.
To finish up, here’s a fantastic short video that explains more about how these balance transfer credit card deals work. Check it out!
Note: As always, you can watch the video at full screen by clicking the “square” icon that will pop up in the lower-right corner of the video after it begins playing.