I was lamenting to friends how after years and years of squirrelling money away for a potential stock market crash, my hands (and heart) got itchy and I bought a condo apartment, only to witness the market crash spectacularly. I always thought a downturn was due soon, but not this soon.
I maintain a certain amount of savings, but not nearly the war chest I want to have in this time of opportunity. Here’s where having access to cheap funds is very useful.
How it works
Credit card companies have been pushing 0% interest balance transfers with a processing fee. The company deposits the money in a bank account of your choice, and you repay this much like how you would repay a credit card balance. I think such cheap funds make even more sense now that stock markets are depressed.
Here’s how I think a working adult with a gross monthly salary of $5,000 can play this game:
|Credit limit||$20,000 (maximum limit of 4 times monthly salary)|
|Balance transfer||$19,000 (borrow up to 95% of $20,000)|
|Amount credited to account||$18,715 / $18,525 (deduct 1.5 or 2.5% processing fee)|
|Monthly repayment||around $190 (1% of outstanding balance)|
|Full repayment||6 or 9 months later|
This is like getting a 4-month advance of your salary to be repaid 6 or 9 months later, and you can make use of the funds now to purchase stocks.
Assessing the risks
Is it risky? I don’t think the risk is high if you don’t spend a lot over the next 6 months. Think of it as saving your next few salaries in the stock market now while it’s cheap.
On a $5,000 gross salary, $4,000 is take-home, of which you need to set aside $3,150 each month to meet the repayment after 6 months. This assumes you have totally no other savings, invest 100% of the $19,000, and wish to keep the stocks after 6 months. For a balance transfer of 9 months, you need to save roughly $2,100 per month to pay the balance off at the end of the tenure.
Tweak your exposure to risk accordingly based on your finances – perhaps only take a $15,000 balance transfer instead of $19,000 if you’re not confident of setting aside $3,150 a month and don’t have other money, or pick a longer tenure.
Even if you don’t pay off the loan in full immediately at the end of the interest-free tenure, it’s not that big a deal to incur a month or two of late charges and interest on a couple thousand dollars even at the exorbitant interest rates. Still, avoid this not very ideal situation, and obviously do not leave the full balance unpaid at the end of the interest-free period, nor miss your monthly payments.
What if the stock markets remain down after 6 months? You get to keep the stocks until it makes sense to sell, and since your balance transfer is paid off you don’t have any pressure to sell off your shares, unlike other forms of leverage like margin trading.
Do the crystal-ball gazing yourself: do you think the stock market will be higher than now over the next year or so?
Are you able to save monthly to take advantage of the current financial situation?
If both are a yes, this is quite a no-brainer game to play.
Of course, this does not constitute personal financial advice, so please proceed at your own risk or speak to an adviser you can trust not to squeeze you out of commission.
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Getting a good deal
If you want to embark on this strategy, I have a deal for 1.5% processing fee for 6 months for you. You even get free AirPods if are you are new to StanChart’s credit products.
|Tenure||3 months||6 months||9 months||12 months|
|Effective Rate||2.83% pa||3.10% pa||3.51% pa||4.86% pa|
For a $10,000 loan, your processing fee is $250 for the 6-month balance transfer. The value of the AirPods almost covers this fee, and if you apply for subsequent credit cards from StanChart you get $50 for each card that is approved.
I think the 3-month tenure may be too short, and the 12-month’s 4.5% fee is a tad too expensive. 6 to 9 months would be the sweet spot between duration and a reasonable fee.
Found better rates or have other sources for cheap funds? Let me know in the comments!
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