Posted by: saveafewbucks | May 8, 2011

Entering the World of Balance Transfers

I mentioned to co-workers the other day that I will be working on paying off my student loan as my next goal. Both suggested I should use a credit card with a 0% balance transfer to pay off a portion to lower the interest rate of prime +2.5 on the Federal portion and +1.0 on the Provincial portion. One co-worker used these loans to pay off a portion of his mortgage. It’s not that I haven’t thought of this trick, it just scares me given my past (see: last year’s period of unemployment). So I really must consider the benefits and risks with taking on a balance transfer.

Benefits

  • Saving moola. Lots and lots of moola.
    • The current prime rate is 3%, which means I’m paying between 4-6.5% on my loan.
    • For $30k, let’s say at 5.5% for simplicity sake, I”m paying $1,650/year or $137.50 per month in interest.
  • In addition, due to a decline in unemployment and projected GDP increase, the prime rate is expected to increase in the upcoming months. We just don’t know when.
    • Potentially saving more money
  • I’ll be debt free sooner which means I can focus on other financial goals. Such as saving up for a place of my own. 🙂
  • It would force me to focus on paying down my loan above all else (i.e. frivolous spending) as I HATE having non-government student loan balances.

Risks

  • Losing my source of income again and thus losing my ability to make the required payments
    • I currently have 100% funded government loans, so in the event I lose my job I can put the payments on hold.
  • See above. See above. See above…

There is a good chance that I will go through with the balance transfer. I guess it all comes down to how secure I think my job is/how long I want to stay at it. It might not seem like much, but I think once you’ve been unemployed the experience is a tad psychologically damaging.

If I do go ahead with the plan, there’s the issue of how much is managable so that it will be fully paid off before the promotional interest period ends.

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