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Home >> Manage Your Money >> Personal Finance
Would it be Cheaper to Switch Loans?
I am 12 months into a 48 month unsecured loan for $15,000 at 18% fixed interest. I have the ability to pay off the loan now with a different loan that is offering me an introductory one-year rate of 1.87% with 19.9% after that. I don't have any problems making the payments as is, but would it be less interest to get the new loan and pay off the original one?
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 Your present loan sounds like a closed-end loan, and the newer loan sounds like a credit card account or other open-end arrangement. Whether or not you'll pay less interest with the new arrangement depends on whether there are any prepayment penalties for paying off the first loan early, and any fees for drawing on the new loan. Of course, the major consideration would be how quickly you pay off the loan balance, regardless of which lender has advanced the funds. The faster you pay it off, the less interest you'll pay.
Your 48 month fixed-rate loan should call for monthly payments of $440.62. If you were to pay that same amount each month for 12 months at 1.87% annual rate and then at a fixed annual rate of 19.9%, you should actually pay off the $15,000 about 6 months sooner than you would at a single rate of 18%. That would suggest that you'd pay about $2640 less that way, because you would have reduced the loan so quickly in the beginning.
Published on BankingQuestions.com 6/30/08
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