Yes! Car Loan Paid off by FREE Money from Credit Card!!

car loanEarly last week, I contacted Citibank to request a balance transfer check from the 0% balance transfer offer from the Citi Driver’s Edge card. I want to use the free money (yes, free. 0% APR and $0 fee) to payoff our car loan which is at 4.90% APR and will expire in May 2010.

The check of $17,000 arrived over the weekend, was deposited Monday, the money showed up in my bank account Tuesday, and I called Chase yesterday to pay off the remaining $16,306 on our car loan! With the move, we save nearly $1,000 over the next two years if we choose to keep the loan. Though the $640 monthly payment was never a problem, keeping pay $4.90% interests while earning sub 4.0% APY from banks doesn’t make too much sense.

This isn’t the first time we use free money from credit card to pay our car loan. Six years ago, I also borrowed money for free from a credit card to pay off the remaining 1-year loan on our first financed vehicle.

Now that our car loan is paid off, the only debt we have is our mortgage, which is a 5-year ARM currently at 4.75%. The rate will be subject to its first adjustment in the summer of 2009. Our lender, Countrywide, keeps calling me ask me if we want to convert the mortgage to a fixed rate. Well, we are not in any hurry to convert the loan because we still have more than one year with the current rate and we are hoping to buy a new house before the rate starts to go up. Besides, we have been making extra payments since we got the loan. So even if we don’t move before the fixed rate ends, we can still afford the first couple of adjustments to see what kind of market we will be facing at that time.

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12 Responses to “Yes! Car Loan Paid off by FREE Money from Credit Card!!”

  1. Jeremy |  Feb 28, 2008 at 12:21 pm

    You know, that isn’t a bad idea. We have about 5 grand left on one of our auto loans, and while the rate is good, now that the cash sitting at the bank is making even less, it might make sense to find a 0% card and do the same.

  2. STLPlace |  Feb 28, 2008 at 4:13 pm

    I remember I did similar thing a while ago.

    But from now on I am going be more be cheaper: I am thinking about buying only used cars from now on, because I heard an old saying “when one drives the new car off the lot, he/she is losing thousands of dollars” :-)

  3. Sun |  Feb 29, 2008 at 12:01 am

    Jeremy: The we want to pay it off now is because bank interest rates are just too low to put the money in the bank. If you want to do the same, make sure you find a card that doesn’t charge balance transfer fee, though that’s quite rare now.

    STLPlace: That’s probably true, but buying used car is just so much a pain. Plus I am not knowledge enough to know if there’s any problem under the hood :)

  4. Tim |  Feb 29, 2008 at 4:25 am

    I guess I’m a little confused. How is your car loan paid off, when you simply transfered the debt to the Citi driver’s card? Moreover, although you were paying $640/mo, you will now have to save or pay $1700/mo in order to pay off the citi driver card in 10 months before the 0% promo ends (remember the promo started when you got the card, not when you got the BT, at least this is my experience with the 6 citi cc 0% promos that I have taken). These 0% deals are great and you are lucky that you were able to get the citi driver’s without the fee (there is a 3% no cap fee now); however, there should be a serious caveat to these 0% deals–that is, don’t get drawn in by the 0% if you cannot pay off the amount before the promo date ends.

    i’m sure you’ve already done the math and can afford to pay the $17k in 10 months; otherwise, you’ll be paying interest on $10,600 ($17k-($640*10)) for much longer and at a much higher interest rate (i.e. default rate after 0% promo ends) than the original car loan that would end in may 2010. this is based off of the original $640/mo car loan payment.

  5. Jeremy |  Feb 29, 2008 at 10:30 am

    Right Tim, this would only work if you have the money in the bank already, or will have the means to pay it off before the interest kicks in.

    It is just transferring funds around, but instead or earning -4.9% on the loan and maybe 3.8% on the savings, leaving you with a net return of -1.1%, you can effectively use the 0% money to give yourself a +4.9% return, let your cash sit in the bank and still earn 3.x% and pay it off in full in 10 months or slowly over time.

    Either way, instead of a 1% loss, you’re going to end up somewhere between a 5-8% gain with this method depending on how you structure the repayment.

  6. Tyle |  Feb 29, 2008 at 11:15 am

    I totally agree with Tim. Sure, you “paid” off your car, but you just moved the debt around. And like he said, if you can’t pay off the car by the time the promo ends, your efforts will be completely destroyed by just a few months of interest on that money you transferred. Stupid in my opinion. That is why I take these blogs with a grain of salt.

  7. Tim |  Feb 29, 2008 at 5:18 pm

    Jeremy, I understand the concept. it only works if you have the ability to pay off the entire amount within the promo period. Sun emailed and clarified that the cash to payoff is already in reserve, in which case the point is moot. of course if i had the payoff cash in reserve, i would only pay minimum each month rather than the regular car payment of $640/mo in order to maximize the 0%; however, sun wrote he is going to continue $640/mo towards the cc.

    i have also rolled money into 0%, but at a certain point, especially now that savings interest rates are low, i can’t see continue doing arbitrage or bouncing debt around, although I have no debt.

  8. Sun |  Feb 29, 2008 at 9:03 pm

    Tim, Tyle and Jeremy: I wasn’t able to post this response early on.

    It’s true that right now I simply transferred one debt to another. However, since I don’t pay anything for the transfer (yes, thanks the no fee offer), I didn’t really call it a “debt.” Another reason I decided to do it now is the remaining loan is at a more manageable, or affordable, level so it won’t become a burden. I wouldn’t even consider taking this approach if the loan is, say, $25,000.

    I have done quite some balance transfers before and all were paid off when they were due. This time it’s different from all those 0% balance transfer I did before because I did “spend” the money instead of just letting it sit in the bank. We do have the money available to pay off the loan if we want to do it right away. However, using a 0% BT offer gives us more time (12 months) and makes the process more gradual. I plan to continue to make $640 payment to my credit card as if I am still paying the loan instead of just the minimum payment so when the credit card offer expires, I only need to pay $10,000 roughly. Since interest rates are likely to go even lower, there isn’t much profit even I save all the money in the bank for one year. What I should have done when I called Citibank is to move another $10,000 from another card and take it all out.

    Maybe I can find another no fee 0% BT offer at that time and keep it rolling for another 12 months :)

  9. Great post. We offer similar advice on our fresh finance blog

  10. Courtney |  Mar 02, 2008 at 6:35 pm

    Great post, we just did the same thing except we don’t have the money to pay off the loan. However, we will by the time the balance transfer becomes due. Until then we will collect payments in our savings account while it accumulates interest.

    I am looking at it as a free $500 or so to put towards our debt. :)

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  12. John |  Jan 01, 2010 at 9:23 pm

    Hey, Sun…

    I have a student loan of $ 16 k which is defaulted currently. I’m thinking about consolidating the loan using my visa credit card.
    Can it be possible?
    Or what do you recommend?
    Thanks for your help and time.