The spread between rates on US credit cards and personal loans is hovering near the widest on record, implying that consumers could see massive interest savings by transferring their credit card debt.
Unsecured personal loan rates consistently remained around 2 percentage points below credit card rates from 1985 to 2015 but in the past year the difference has soared to more than 10 percentage points.
“The difference is now so large that borrowers can lower their monthly payments while rapidly paying down their debt by transitioning from credit cards into installment loans due to the difference in amortization between the two,” Vadim Verkhoglyad, head of research at market data company dv01, wrote in a Linkedin post.
According to Federal Reserve data, the average rate for credit cards issued by commercial banks was a record 22.8% in August, compared with 12.2% on two-year personal loans.
With US credit card debt now exceeded $1 trillion, there is a substantial opportunity for market participants to target credit card borrowers to unlock substantial potential savings, says Verkhoglyad.
He calculates that households could save more than $60 billion a year if all credit card debt was refinanced at today’s rates into unsecured installment loans.
This article was provided by Bloomberg News.