Taking out a loan is often necessary to cover large expenses or to consolidate debt. However, loans come with interest charges that can make them difficult to pay off, especially if you are only making minimum payments each month. This results in more of your payment going towards interest rather than the principal balance.
One strategy that can help you pay off a loan faster and for less money is transferring the balance to a 0% introductory APR credit card. This article will explain what balance transfers are, their pros and cons, and how to use them effectively to pay off a loan faster.
What is a Balance Transfer and How Does it Work?
A balance transfer allows you to move an existing balance from one credit card or loan over to another credit card. Many credit card companies offer promotional balance transfer offers, such as 0% interest for 12-18 months.
This introductory 0% APR means you won’t have to pay any interest on the transferred balance during that promotional time period.
Here is a simple overview of how a balance transfer works:
- You open a new credit card that offers a 0% intro APR balance transfer promotion
- You request to transfer an existing balance from another credit card or loan to the new card
- The credit card company pays off the loan or card directly and transfers the balance
- You now owe the balance on the new credit card at 0% interest for the intro period
- Make payments on the new card to pay off the debt before the regular APR kicks in
Balance transfers only work to transfer existing balances – you cannot use them to pay new purchases or take out cash advances. The goal is to transfer a balance you are currently paying interest on to avoid that interest for a period of time.
The Benefits of Balance Transfers for Paying Off Loans
There are several key benefits that make balance transfers a smart financial move for paying off loans faster:
1. Interest Savings
The biggest benefit is the interest savings you can gain from a 0% APR introductory offer. By transferring your high-interest loan balance to a card with a 0% promo rate, you avoid paying interest during that period.
For example, if you transfer a $5,000 personal loan with a 10% APR to a card with a 0% rate for 15 months, you would save around $625 in interest during that time! This extra savings can help you pay off the principal balance much faster.
2. Fixed Monthly Payments
Having a fixed monthly payment can make it easier to budget and pay off your loan on a predictable schedule. Credit cards have set minimum monthly payments, usually around 2-3% of the balance. You can pay more than the minimum to pay off the debt faster.
With a personal loan, the monthly payment amounts are fixed over the full loan term. By transferring to a credit card, you have more flexibility with payment amounts.
3. Consolidate Multiple Loans
Many balance transfer cards have high credit limits, which allows you to consolidate multiple loans into one balance transfer. This simplifies paying off your loans by tracking just a single credit card payment each month.
4. Improve Credit Score
As you pay off your credit card balance transfer, this activity can improve your credit utilization ratio. Keeping balances low compared to your credit limits helps boost credit scores over time.
Paying off installment loans also improves your credit mix since you’ll show responsible use of revolving credit. Overall, balance transfers used properly can build your credit history.
What to Look For in a Balance Transfer Credit Card
To maximize the savings from a balance transfer, you’ll want to find the right card with the best terms. Here are some key factors to look for:
- 0% introductory APR: The intro 0% interest rate period should last at least 12 months, with 15-18 months being ideal. This gives you over a year to pay off your loan without accruing interest.
- Balance transfer fee: Most cards charge a balance transfer fee, usually 3-5% of the amount transferred. While you want this fee to be low, it may be worth it for substantial interest savings.
- Credit limit: Find a card with a credit limit higher than your loan balance so you can do the full transfer.
- Balance transfer timeline: The card should let you do balance transfers within the first 60-90 days to take advantage of the full intro period.
- Balance transfer incentives: Some cards offer incentives like no balance transfer fees or bonus rewards to attract transfers.
Always compare cards side-by-side to find the optimal balance transfer option. You can use online tools or talk to a credit card representative to explore choices.
How to Use Balance Transfers to Pay Off a Loan
Once you’ve chosen the right balance transfer credit card for your situation, here are some tips to use the 0% intro APR strategically:
1. Make the Transfer ASAP
Complete the balance transfer right away during the introductory transfer period, often 60-90 days after opening the account. This ensures you get the full 0% interest duration to pay off the balance.
2. Pay More Than the Minimum
Keep paying at least the minimum payment, but pay as much above that amount as you can afford. This will pay off the principal faster, saving you overall interest.
3. Pay Off the Full Balance in the 0% Period
Work towards paying off the entire transfer amount before the intro APR expires. Otherwise, any remaining balance will start accumulating interest at the regular rate.
4. Don’t Use the Card for Purchases
Avoid using the card for any purchases while paying off the transfer. The low rate doesn’t apply to new charges, which will make the balance harder to pay off.
5. Review Balance Transfer Offers Often
Check for new balance transfer offers about 3 months before your intro rate expires. You may be able to do a new transfer to extend the 0% interest period.
6. Automate Payments and Budget
Set up automatic payments and have a monthly budget to ensure you can pay on time and meet payment goals. This will help you stick to a payoff plan.
Pros and Cons of Balance Transfers for Loans
Before doing a balance transfer, weigh the potential upsides and downsides:
- Avoid interest charges during the intro period
- Consolidate multiple debts into one payment
- Can help improve credit score over time
- Flexible monthly payment amounts
- Usually a quick and easy process
- Balance transfer fees can add to overall balance
- Risk of running up card balance after transfer
- Deferred interest if not fully paid off
- Need good credit score to qualify for best cards
- Does not solve underlying overspending issues
Overall, balance transfers work best for those with solid financial habits who need short-term interest savings while paying off a loan aggressively. Use balance transfers strategically as one component of an overall debt reduction plan.
Alternatives to Balance Transfers for Loans
Balance transfers with a 0% intro APR offer are just one approach to saving on loan interest. Here are a few other strategies to consider:
- Debt consolidation loan – May offer lower rate than existing loans
- Home equity loan – Interest may be tax deductible
- Refinancing – Could get better rate from current or new lender
- Hardship program – Lender may offer special rate reduction
- Credit counselling – Non-profit may negotiate lower interest
- Debt settlement – Settling for less than owed if very delinquent
Look at your full financial picture and research all options to find the best loan payoff method for your unique situation.
With high loan interest rates, a 0% balance transfer can provide significant savings on interest payments over 12-18 months. This allows more of your payment to go towards the principal balance each month so you can pay off the loan faster.
Just be sure to have a disciplined plan and budget in place to pay off the full card balance before the regular APR kicks in. Used strategically and responsibly, balance transfers remain one of the most effective short-term tools for reducing interest costs on existing loans.