Clients come to us with many consumer and personal bankruptcy questions. One recent question we hear is about the transfer of a high, or moderate, interest car loan to a low or zero interest credit card loans. Is this wise?
Let’s look at it from the perspective of the typical client who simply wants to reduce his or her interest rate from the 5% motor vehicle loan to a “teaser” zero percent rate with a new credit card. Many banks and lender allow this. According to a CardHub.com study, eight major lenders, including Barclays, Capital one, Citi, Discover, USSA and Wells Fargo, will do this type of transaction. These banks typically have no annual fee, interest for up to 18 months but a 3% transfer fee. And you have to qualify!
Even if you do qualify, be careful. Most of these banks charge over 10% and up to 22% for balances. Thus, after the 18 months, you can be paying double, triple, or even quadruple for your “vehicle” loan. Thus, if you can do the transfer, not get hit with penalties and percentages that are costly, and pay off the vehicle before the 18 month time period kicks in, it may make sense. Once the higher interest rate becomes effective, you may very likely lose out.
How Will Transferring Debt From One Creditor to Another Affect My Credit?
How else can you lose out? Your credit score may be adversely affected. When you apply for “new” credit, your score is likely to go down. Paying off the vehicle will not reduce your debt, so that will not bring up score. Further, with revolving debt (credit card debt) is riskier than secured, or installment, debt. This is because there is no “security interest” for the lender the way a car loan or a mortgage has an “interest” in the property.
In addition, most folks who are considering this notion do not have the best credit score in the first place. Thus, you may be teased into believing there is a great rate, or no rate, but you may be hit with penalties and the maximum interest if you are late on a single payment. It can be very high risk.
Can I Transfer My Car Loan to a Credit Card and Discharge the Debt in Bankruptcy?
Finally, let’s consider this from a bankruptcy perspective. If you are paying off your car loan, that’s good. If you do so by transferring the auto loan to a credit card, that’s legal. But, if you undertake this transaction to simply have unsecured debt (a credit card) verses secured debt (a car loan) that you attempt to discharge in federal bankruptcy, that’s a fraudulent transfer. It’s illegal.
Before making any financial decisions that may have an adverse affect on a bankruptcy, contact an attorney with experience. It is generally cheaper and easier to get sound pre bankruptcy planning than to fall into the traps of the banks who are really just looking for you to pay 20% on your vehicle.