How to use a cash advance or balance transfer to save hundreds or thousands of dollars in interest payments
While many individuals associate a cash advance with exorbitant fees and high interest rates, you can find options out there that are a better deal than your federal student loans. Shocking, isn’t it? If your immediate reaction to a cash advance offer in the mail is to shred, that’s not a bad thing. However, it would do you good to look at the terms of the offer.
Trade your high interest federal student loan for a low interest cash advance. I recently utilized a cash advance with better terms than my federal student loan. Terms offered: 0% interest for 12 months and a one-time 3% processing fee. Are you kidding me? 0% for 12 months? This is awesome. Grace periods upon graduation for federal student loans are typically 6 months. Private student loans rarely offer a grace period of any kind. And here we are, being offered 0% for 12 months. Fantastic. Ok, so you still have to consider the 3% processing fee. Let’s compare the two loans. I decided to take out $13,000 in a cash advance and pay about $1,000 a month for the next year to ensure the $13,000 cash advance was paid off before 0% interest reached into the double digits. To understand how this compares to your federal interest rate, you have to understand how interest is calculated.
Interest on your federal student loans is calculated using a simple interest formula. Let’s say you pay 7.75% interest on an annual basis. Yes, 7.75% is incredibly high. Welcome to GRAD Plus loans. When I took out my first GRAD Plus loan the interest rates were 8.5%. That’s right. 8.5%. I was able to reduce this to 7.75% through Special Direct consolidation and auto-payment incentive programs (an upcoming article). In any case, I am paying 7.75%.
So, on $13,000 my federal student loan interest for the year is $13,000 x 7.75% =$1,007.5. Simply multiply $13,000 by 7.75%. What does this mean? It means that I will pay $1,007.50 a year on $13,000.
Utilizing the cash advance with 0% interest and a 3% processing fee: $13,000 x 3% =$390. Keep in mind 3% is a standard processing fee, which you often find in cash advances or balance transfers Keep your eyes out for anything less than 3%.
Thus, I paid $390 instead of $1,007.50. This is a savings of $617.50! Now I realize that $617.50 does not seem like a lot of money to you when you owe tens of thousands and maybe even hundreds of thousands of dollars, but it adds up. And can’t you think of a better way to spend $617.50? I can. I expect I will utilize this trick once a year until my loans are paid off and possibly in higher amounts as my income increases.
Thus, to realize the savings above simply trade in your high interest loan for a low-interest cash advance for a year. $617.50 to do with as you like! And as the average student loan debt is about $27,000, this is something we can all utilize. Granted, this assumes you are able to make $1,000 payments a month but the same principle applies to lower amounts. Let’s say you can only afford to pay $5,000 over the course of a year in student loan payments. $5,000 a year is about $417 a month. $5,000 X 7.75%= $387.50 a year compared to $5,000 x 3% (common processing fee)=$150. $387.50-$150= an annual savings of $237.50!
While many individuals associate a cash advance with exorbitant fees and high interest rates, you can find options out there that are a better deal than your federal student loans. Shocking, isn’t it? If your immediate reaction to a cash advance offer in the mail is to shred, that’s not a bad thing. However, it would do you good to look at the terms of the offer.
Trade your high interest federal student loan for a low interest cash advance. I recently utilized a cash advance with better terms than my federal student loan. Terms offered: 0% interest for 12 months and a one-time 3% processing fee. Are you kidding me? 0% for 12 months? This is awesome. Grace periods upon graduation for federal student loans are typically 6 months. Private student loans rarely offer a grace period of any kind. And here we are, being offered 0% for 12 months. Fantastic. Ok, so you still have to consider the 3% processing fee. Let’s compare the two loans. I decided to take out $13,000 in a cash advance and pay about $1,000 a month for the next year to ensure the $13,000 cash advance was paid off before 0% interest reached into the double digits. To understand how this compares to your federal interest rate, you have to understand how interest is calculated.
Interest on your federal student loans is calculated using a simple interest formula. Let’s say you pay 7.75% interest on an annual basis. Yes, 7.75% is incredibly high. Welcome to GRAD Plus loans. When I took out my first GRAD Plus loan the interest rates were 8.5%. That’s right. 8.5%. I was able to reduce this to 7.75% through Special Direct consolidation and auto-payment incentive programs (an upcoming article). In any case, I am paying 7.75%.
So, on $13,000 my federal student loan interest for the year is $13,000 x 7.75% =$1,007.5. Simply multiply $13,000 by 7.75%. What does this mean? It means that I will pay $1,007.50 a year on $13,000.
Utilizing the cash advance with 0% interest and a 3% processing fee: $13,000 x 3% =$390. Keep in mind 3% is a standard processing fee, which you often find in cash advances or balance transfers Keep your eyes out for anything less than 3%.
Thus, I paid $390 instead of $1,007.50. This is a savings of $617.50! Now I realize that $617.50 does not seem like a lot of money to you when you owe tens of thousands and maybe even hundreds of thousands of dollars, but it adds up. And can’t you think of a better way to spend $617.50? I can. I expect I will utilize this trick once a year until my loans are paid off and possibly in higher amounts as my income increases.
Thus, to realize the savings above simply trade in your high interest loan for a low-interest cash advance for a year. $617.50 to do with as you like! And as the average student loan debt is about $27,000, this is something we can all utilize. Granted, this assumes you are able to make $1,000 payments a month but the same principle applies to lower amounts. Let’s say you can only afford to pay $5,000 over the course of a year in student loan payments. $5,000 a year is about $417 a month. $5,000 X 7.75%= $387.50 a year compared to $5,000 x 3% (common processing fee)=$150. $387.50-$150= an annual savings of $237.50!