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I’ve been getting lots of balance transfer offers from credit card companies. For a small transfer fee of only 4%, I could transfer my debt and receive an interest free period of 12 months to pay it off.
For example, one could transfer $10K, pay a transfer fee of $400, pay $867 over the next 12 months. The payments plus the transfer fee would amount to $10,400, making the true cost of the loan 7.3%. (The higher interest rate is due to the ever shrinking loan balance).
Of course, you are in no obligation to pay the balance off in one year, but going beyond the year will result in a much higher interest rate, as high as 29%.
I came across a confusing term called the ‘money factor’. This is a term used by the dealership when you are leasing a car. After asking a salesman, he explained that there isn’t an interest rate on a lease any longer, they now calculate the ‘money factor’.
I asked if he had a calculator. He opened up his phone app. I had him multiply the money factor, (.002458333) by 2400. The answer, 5.9%.
So many creative ways that ‘they’ devise to get our money.
As I understand it money factors were just a thing introduced by the leasing industry to make it easier to calculate interest when there was both a declining balance and a fixed balloon payment. Of course wouldn’t really be needed these days as a tool could easily calculate both separately and combine.
I suspect that the sleight of hand continues to work for the industry i.e. 0.0025 sounds really low and the fewer people who compare to external interest rates the better.
The moral of the story – every one is out to make some money, regardless of how nicely it’s packaged.
Thanks for the education about money factor, Dan. It was something I didn’t know about. Chris
Other than abuse and the odd smile, you don’t get much for free these days. I guess for someone who already had $10,000 of debt at 29%, a 7.3% transfer is a compelling offer. The question is, would they use the breathing space to meaningfully chip away at the debt?
Indeed.