This morning I got checks from my credit card company to use against my credit line. They were offering 0.00% APR until August 2010. Then it goes back to my normal credit card APR of 12%. My current auto loan interest is about 7%. Sounds like a deal.
But, of course, in fine print there was transaction fee of 3% of total check amount. So I did some math:
- I owe about $9000 on my car.
- 3% of 9000 = $270
- I would need to pay off this amount in 9 months to avoid much higher APR.
Now let’s look at what would happen if I pay off my current loan in 9 months at 7% APR.
- Month 1: Balance: $9000, Payment: $1000, Interest paid: 9000 * 0.07 / 12 = $52.50
- Month 2: Balance: 8000+52.5 = $8052.5, Payment: $1000, Interest: $47
- Balance: 7052.5+47 ~= 7100, Interest: $41.5
- 6100+41.5 = $6141.50, Interest: $35
- 5141.5+35 = 5176.5, Interest: $30
- 4176.5+30 = 4206.5, Interest: $24.5
- 3206.5+24.5 = 3231, Interest: $19
- 2231+19 = 2250, Interest: $13
- 1250+13 = 1263, Interest: $7
- 263+7 = 270, Payment: 270, Interest: $1.5
- Total interest paid: $271
So it is just a dollar more to continue with my current loan, but this gives me piece of mind that I don’t have to make huge monthly payment to avoid much higher interest rate.
Above calculations are a little rough, you will probably want to use some online calculator to figure out more precise numbers like: this one.
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