Should You Swap Credit Card Outstanding Balance With Personal Loan for Lower Interest rate?
With banks chasing you to take up personal loans, if you have credit card debt that carries an 18% interest p.a., does it make sense to swap the credit card debt with a personal loan that only charges 12% interest rate p.a? By swapping high interest credit card debt with lower interest of personal loan, you have an instant 4% saving! Or does it?
First, do the math
To see if swapping credit card debt with personal loan is a worthy deal, let’s assume that you currently have an outstanding credit card debt of RM5,000. There are two options available; option A is to take a personal loan to fully settle the credit card debt at one go; Option B, you make the same monthly fixed payment as in the personal loan that you about to take to pay your credit card debt. To simply the matters, let further assumed that in either situation, you need 2 years to fully the credit card debt.
Using payment table published by one bank, a monthly payment for a 2 years RM5,000 personal loan is RM258 per month. Here is what happens after 2 years.
EXAMPLE: PERSONAL LOAN VS CREDIT CARD DEBT:
How this could happen? Remember the old saying “time is money?” The various personal loans offered by the bank uses a flat interest rate while the credit card uses a daily rest interest rate. A daily rest interest rate reduces the overall accrual interest as the loan/debt is gradually shrinking. As a matter of fact, to achieve interest rate parity, I need to find a personal loan that charges 8.6% pa. (and this excludes the processing fees which can go as high as RM200). Standard Charted and UOB has one with 7.5% and 8.5% p.a respectively. But for UOB, to enjoy that low rate, you have to borrow RM50,000 and more. The question is if you have a whopping RM50,000 credit card debt, can you loan be approved
Then know your history
Since Personal loan an unsecured loan, those with poor credit rating will likely to be rejected. Varies from bank to bank, the rejection rate is in the range of 60-70%. Do not tick ‘loan consolidation’ box as the purpose of applying the loan. A quick take, if you have missed 2 to 3 months credit card payments consecutively, it is quite unlikely that your loan application will not be approved.
So what?
So are you still interested to switch a 12% for a 18% p.a loan? Well if you struggle with credit card debt but still are able to serve the monthly payment; steer away from such a loan.
If you are struggling to meet the minimum repayment, you can just simply throw the cost and benefits consideration out of the window, and hope for the best.
With so many banks offering ‘easy money,’ one can easily get carried away and indulge in consumerism - thus likelyhood of incurred credit card debt. It is always not wise to borrow money for consumerism purpose such as for holiday, or buy a plasma TV. But if you have an emergency and is in need of money, personal loan might be a good option to consider.
Key words: Personal loan, credit card debt, swapping credit card debt, time is money
References: Information are collected from respective bank websites, newspaper advertising, and call made to bank call centre. Research carried out from Aug – Oct’06