Is it worth taking a cash loan to pay off a credit card debt, and vice versa

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

Sometimes you can go the non-obvious way, but only if there are reasons for this.

The strategy of taking out a new loan to pay off the old one is usually assessed negatively. The criticism makes sense: often, because of the excessive debt burden, these loans do not end there. As a result, a person sinks deeper and deeper into the bottom of the financial pit. But if used properly, a new loan can be good.

Please note: a cash loan is understood as an ordinary bank consumer loan. It is definitely not worth going to a microfinance organization for money to repay another loan.

What is the Difference Between a Credit Card and a Cash Loan

To speak in detail, we need to decide on the main criteria that will help in the calculations. Therefore, we will not compare all the differences, but only the key ones for our topic. There are two of them.

Period of interest accrual

With a regular loan, interest on the debt begins to accrue from the first day. The cards have a grace period during which you can use the bank's money for free. Most often, we are talking about a period of 60–90 days in order to repay the debt and not overpay. This does not mean that you have only three months to use the money without interest. If all conditions are met, the grace period is extended.

Interest rate

The weighted average interest rate on loans for up to one year is now 13.72%, more than a year - 10.36%.

There are no such statistics for credit cards, but you can see the offers of popular banks. On average, the interest rate will be 23-25%. But it usually only works for non-cash payments for purchases. If we are talking about repaying a loan, then you will have to withdraw money in cash or transfer to another account. And the rate for such operations is often higher - up to 50%. Even in such cases, the grace period may not apply, so interest will begin to accrue immediately.

Next, we will consider averaged situations. Therefore, for each individual case, it is recommended to calculate everything and weigh the pros and cons, taking into account your input.

When to take a cash loan to pay off credit card debt

This will be a worthwhile step in most cases.

If you are concerned about such a question, most likely, the grace period is either over or coming to an end, and the amount of the debt does not give hope of repaying it in the near future. Therefore, you have to deal with interest, and interest is rather big.

Let's say you owe the bank 100 thousand rubles. Even without taking into account the nuances, a loan at 13.72% is much more profitable than at 20%. And given that cash loans can be found at more attractive rates than the average, the benefits are even more obvious.

When you shouldn't take a cash loan to pay off your credit card debt

There are several cases when doing this is not something that is strongly discouraged, but you need to carefully weigh the pros and cons.

You have a small debt that you will pay off in a few months

Let's say you did not fit into the grace period and interest began to accrue to you. But you clearly understand that in 2-3 months you can easily say goodbye to debt. Of course, compared to a cash loan, you will pay a little more. But in a couple of months the difference will not be very significant, so it is hardly advisable to fuss.

Your credit history is not good

The less conscientious you look in the eyes of the bank, the less favorable conditions you will be offered for a consumer loan. In some cases, the differences from the terms of the credit card may be so insignificant that it is much easier to pay off the existing debt.

Of course, no one will forbid you to try to get a new loan on favorable terms. But here it is important to remember that refusals, if any, also end up in the credit history - and worsen it.

When to open a credit card to pay off another loan

This will be impractical in the vast majority of cases.

The interest-free grace period is quite short, and it is profitable to open a credit card if you manage to pay off the debt on it in 2-3 months. However, if you already pay off the loan in the near future, there is no point in fussing.

But that's not all. First, most loans are paid in annuity, that is, equal payments, the structure of which is different. By the end of the term, you mostly pay off the body of the debt and have almost paid the interest, that is, you will not be able to save on them.

Second, you will most likely have to pay for servicing your credit card, as well as for withdrawing cash or transferring money. So it is easier and more profitable to continue making payments on an existing loan.

But there are situations when a credit card can really help you out.

You finish paying your mortgage and want to urgently sell your apartment

Until you pay off your mortgage, the home is pledged to the bank. You cannot fully dispose of it. But it so happens that there are only a few months of mortgage left ahead, and the apartment must be sold immediately. In this case, the balance can be paid off from the credit card, and then the money can be quickly returned to it.

It is important to understand here that for transactions with real estate, it is required to register the removal of encumbrances with Rosreestr. The operation itself in the department is done quickly, but there may be problems with the collection of documents, primarily in the bank. So don't think that you can pay off your mortgage with a credit card today and sell your apartment tomorrow.

And of course, it is important to find a credit card with cheap service and acceptable interest rates specifically for cash withdrawals or money transfers.

You are about to finish paying a car loan and want to sell your car urgently

With cars on credit, a similar story, albeit without the removal of the encumbrance in Rosreestr. Usually banks do it even easier: they take the vehicle's passport before paying off the debt.

You finish paying the car loan, but the comprehensive insurance will expire a couple of months before the final payment

Car loan and casco are inextricably linked, because the bank wants guarantees that you will not leave it without the opportunity to return your money. But this is quite expensive insurance, and usually drivers prefer MTPL.

Let's imagine a situation: you have to make the last payment on a car loan in two months, and your comprehensive insurance will expire tomorrow. If you repay an auto loan with a credit card, you can issue an OSAGO with a clear conscience and not overpay for insurance.

When you shouldn't open a credit card to pay off another loan

Almost always. If you do not have a plan that logically justifies the repayment of a loan from a credit card, then it is not advisable.