I’m looking to borrow about $25K for a short amount of time (less than 6 month). I’ve never really borrowed money outside of my mortgage so I’m a bit of newbie when it comes to credit card tricks and personal loans.
I was on the phone with a lender investigating secured (against my car) and unsecured personal loans. The rates in Australia are around 9.5% and 13.9% respectively. The guy suggested that I might want to look at using a credit card with low introductary rates since I intend on paying off the loan in 6 months.
So I’ve had a bit of a look around and some cards offer 6 month credit at 0% rates, 0% on balance transfers, and 0% on cash advances. See below link.
What’s the catch here exactly? Where do they sting you on these things? It just seems too good to be true, like free money.
And my next question is regarding balance transfers. Can you just keep transferring the balance from one card to the next and pay 0% forever? Again, what’s the catch? Do you get a bad credit rating eventually from doing this? Is there a fee somewhere?
Before you ask, the reason I’m not borrowing against my house is because I’m actually using this money to get under the mortgage insurance LVR threshold to purchase the house. My plan being to then get the house revalued up (I believe I got a bargain), then borrow against my mortgage to pay back the short term loan.
Borrowing the $25K is actually my plan B. I’ve got one our cars up for sale at the moment (which I should be able to get $25-$28K). I just don’t want to feel pressured to fire sale it before the house settles (in 40 days), so I want the ability to borrow to juggle the cash flows.
Regarding the transfer fees, are you saying that your exiting credit card would charge you 3% of your balance on your way out?
The reason for the 0% is simple–it’s a teaser rate. They figure that if they can get you in, you won’t leave. It really is as good as it sounds. Just make sure that it doesn’t jump to 28% or something after the first six months.
And yes, you can keep rolling the balance from one 0% card to another. I was in the military, and I knew lots of people who did this. (Military people are generally dumb and really bad with money.)
I’d try to get a 0 APR card that lasts a pretty long time, in case things go sour and you’ll need to roll it over to another card.
Not sure if I’d do it for your intended purposes, though. And I actually have a 0 APR advance right now to invested at a spread. But yours seems like another level of risk.
OP, check out Citibank. They will lend you 25k at about 5.9% for the first 2 years. You can terminate the loan earlier but it is cheaper than other personal loans.
Two sets of issues here: one is what the catches are on the 0% rate, the second is whether it makes sense to fund a home down payment on a credit card.
For the card:
The 0% is a teaser rate. They want you to use the card and are hoping that eventually you will pay them lots in interest. For them, they are playing the numbers, hoping that if lots of people take the offer, enough will do things that ring the jackpot for them.
Most of these deals include a 2%-5% transaction fee. If you have a deal that goes for 6 months with a 3% fee and you roll it again six months later with another 3% fee, you aren’t actually paying them 0%, you’re effectively paying 6%. You may decide that 6% is still worth it, but don’t do this deal thinking you are paying zero (some deals used to have 0% transfer fees too, but I haven’t seen that since the financial crisis).
Even though you pay 0% interest on balances (after they’ve added the transaction fee to your balance), you still have to make minimum payments, which in the US are typically around 1-2% of your outstanding balance, so you may start thinking that you aren’t paying any money for six months, but you still have to pay off principal regularly. Again, it may still make sense to take the deal, but make sure you have enough to make those payments.
if you make any mistakes, or a late payments or something, they will jack your rate up to the “normal” or even a “penalty” rate, which here in the US can be as high as 25%. For them, bingo, ka-CHING!
if you don’t have your balance paid off in 6 months, they start charging you at 7 or 10 or 20% or whatever the normal rate on the card is. They often make it deliberately ambiguous when this rate kicks in (is it the first of the month? the first day of the cycle ending in month Y? 180 days from the day the charge hits your account?) because even one month at the normal rate is extra ka-ching in their accounts. They hope you will forget when the rate goes up at least for the first month.
So those are the things to watch for the cards. You can still do them and have it work out right, but 1) they get you on the transaction fee, and 2) avoiding the high rates can be like walking a tight-rope if you aren’t disciplined.
In general, using a credit card to gamble with is a bad idea, whether you are gambling on a home reappraisal or a short term “investment” at a spread. This is because things going wrong with managing the card introduces a lot of extra risk that needs to be managed and often means that the risk-return on the project is really bad.
You have to ask yourself: what will I do if the appraisal doesnt’ come through and I have $25,000 in credit on the card that comes due in 5 months? Or - what happens if for some reason there is something in the fine print that allows them to jack up the rate to 25%? Am I able to pay it off and get out without pain?
What happens if my “spread” investment doesn’t pay off? Am I able to pay off the card before it starts charging me the penalty rate? And does the risk of that happening make the spread still attractive on a risk-return basis.
So there are ways to do it right, but lots of ways for people to get hit with penalties too… and they bank on the fact that lots of people can’t walk that tightrope, particularly since many people need the 0% rate because they’ve made mistakes like that in the first place.
“Margining” a credit card with a limit of $10,000 and investing it for six months in any kind of risk-free asset will probably net you almost nothing. It sounds good until you realize that you made…$100 on $10,000. (Assuming 2% interest received and zero paid for 6 months.)
Well, in your scenario, you’re not paying 6% per year–it’s just a one-time flat fee of 6%. That’s a pretty material difference.
And I have never heard of paying a 3% fee to transfer out. The second card may charge 3% to transfer in, but you’re still only paying 3% per transfer.
But again, if you’re paying 3% every six months, that’s really kinda like paying 6% per year (or technically 6.09%), so BChad is still correct.
For somebody who has a ton of credit card debt, that might still be worth it, especially if you’re paying 22.9% on your current card. But from what I can tell, most WC folks aren’t in that category.
I just meant that if you are constantly rolling and paying 3% transfer fees to the new card every six months, that 0% interest debt is effectively costing you 6% per year. I agree that it isn’t exactly the same, though - it’s worse, because you still end up paying that amount even if you decide to pay off the balance the very next day (whereas you wouldn’t pay additional interest charges after you pay the balance). It’s also worse because you pay that fee up front, so you lose the time value of that money, though that’s a minor correction in cases like these.
Risky but it not really in terms of mezz/bridge financing, the only risk is that your house does not get appraised up or that there is a delay in the processing of your HELOC.
Anyway, I have a few destitute friends who roll their credit card balances over from one form of card to the form of card that you are describing. The reality is there likely is no trick to the low introductory rate because the CC companies are betting that you will not be able to pay the balance off before the introductory period expires. They know with certainty that a significant percentage of the new card holders will either
A) Never pay off the full amount of the newly transfered balance
B) Take the new lower cost of debt as a signal to binge on spending thus using their CC way more then they would have normally.
Its a fantastic way to buy business on the part of the CC companies
Greenie show me a credit card with no fee on balance transfers or a way to convert the line directly to cash via purchases (a reputable issuer that would give a reasonable line) and ill buy you a $50 red lobster gift card. Google 'app-o-Rama fat wallet credit card arbitrage if you want to know how this actually worked - you’re out of your league on this one and shouldn’t be giving advice here.
Given the current credit card and interest rate environments credit card arbitrage is effectively done. You could invest in risky assets and make a spread but that’s not arbitrage.
Bchad is right - it’s a front-load, not a back load, and for a bt you’d need an account with a balance to transfer it to (you used to be able to bt to a 0 balance card and they’d refund the overage, but not anymore).
I caveated my perspective was us based. There’s a lot of risk here, and even technical details you’d need to work out (how are you planning to convert the credit line to cash - will the lender take a cc for the 25k? I doubt they would without charging a fee).
How much is it if you roll the extra 25k into the loan (50 bps)? Can you roll it and then pay down once you secure more desirable long-term financing?
I can transfer money directly to my checking/savings from my credit card online through the “transfer funds” option (but a 3% fee still applies, max of $200). And remember, this is what’s online. Since I’ve been a USAA member for over 10 years, I get even better deals than this.
Thanks for the gift card!!!
EDIT–I googled “App-o-rama fat wallet credit card arbitrage” and got a bunch of stuff from 2004-2006. I think we can all agree that the credit and investing horizon has changed since then.
Your original quote was “I actually have a 0 APR advance right now to invested at a spread.” I took this to mean that it was invested in a no-risk (or at least low-risk) asset.
But where are you getting 14%? If it’s in stocks (and I don’t know where else it possibly could be), then in any six-month period, you could easily lose money. That means you lose money in stocks, lose 3% on the balance transfer, and still owe $10k on a credit card charging 22.9% interest. Not a safe bet by any means.
My current spread is something like 14% – I’m investing around maintaing at least an 8% spread.