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Ask Dave

Funny Way To Calculate Interest

It sounds like a good deal ... getting a loan to pay off your credit card debt. But Dave doesn't think it's a deal at all.

QUESTION: Nick had $25,000 in credit card debt. He’s paying them off little by little, and some have high interest rates. The lady at the bank said she could give him a personal loan for $25,000 that will go no higher than 18%. The payment is $570 a month. But when he talks about how they apply interest, Dave tells him why he should stay away from it.

ANSWER: It’s a bad loan. Don’t take it. This is a rip-off finance company division of the bank which is doing total of payments. They put the loan on the books as the total of all your payments including interest, and you get no benefit for prepaying. You want a simple interest loan if you’re going to do that. Your credit cards are simple interest. Revolving interest is calculated on outstanding balance. What she is pitching to you is not calculated on outstanding balance. It’s calculated as if you played the loan all the way through, straight up, with no extra payments. I wouldn’t do that deal.