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This is a very common question, and I’m glad that you asked it. What people are referring to when they talk about debt being cheaper than equity is how much it costs a business or company to obtain the financing it needs. Two of the central ways to do so are via loans and by selling a certain stake in the company.
Now, when you compare the cost of debt (i.e. a loan) to that of equity (i.e. selling a stake of the company), you need to consider how the interest you would pay over the lifetime of a loan would compare to the portion of profits you’d sacrifice over the lifetime of the company. If the interest would be greater than an investor’s cut of your profits, then debt would be more expensive, and vice versa.
Given that the cost of debt is essentially finite (you have no obligations once it’s paid off), it’ll generally be cheaper than equity for companies that expect to perform well. In other words, the more you expect to profit, the most costly sacrificing equity will be and the more beneficial it will be to simply keep the profits to yourself and pay interest on a loan. For example, if you’re going to be making $100k next year, you’d much rather pay $10k in interest than give up 10% of your profits forever. This is especially true when you consider that interest paid on loans is tax deductible.
It’s obviously difficult to forecast earnings with any certainty, which is why large companies with steady cash flow that are in stable industries tend to make greater use of debt, while less-established companies or those in risky fields may not only find equity to be less risky, but easier to acquire as well.
Whether or not a balance transfer is a good idea depends solely on four things: 1) the type of debt you have; 2) how quickly you will be able to pay it off; 3) both the introductory and regular APR; and 4) your credit standing.
1. Type of Debt: From time to time, you may be able to transfer outstanding debt from certain types of loans (e.g. an auto loan) to a credit card, but most of the time you’ll only be able to transfer credit card debt. That means a balance transfer will usually be a bad idea if the debt you intend to transfer does not currently reside on a credit card.
2. Payoff Time: Credit cards typically charge a one-time balance transfer fee equal to 3% of the debt you transfer. If this fixed cost is greater than the interest you’d pay by not making the balance transfer, then there’d obviously be no reason to go through the hassle. A lot of people who will be able to pay off their debt relatively quickly don’t realize just how much a 3% balance transfer fee can cost them. For example, you’re better off paying a 6% interest rate for six months than paying a 3% balance transfer fee up front.
3. Interest Rate: People often look only at a balance transfer credit card’s introductory APR as well as how long it will last, but if it might take you longer than that to pay off what you owe, you’ll also need to consider each offer’s regular interest rate. You can’t just count on transferring your remaining balance to another balance transfer card when the time comes because none might be available (this is exactly how a lot of people got into trouble during the Great Recession). And if your card’s regular rate is higher than the rate that made you transfer your balance in the first place, your initial savings will quickly disappear. Therefore, when you look at any balance transfer credit card, you should consider how much it will save you not only during the intro period, but over the entire life of your balance.
4. Credit Standing: Most, if not all, of the balance transfer credit cards that are worth getting require good or excellent credit for approval, so if your credit isn’t that good, you should focus on improving it, rather than applying for cards that you can’t get.
If these things won’t be a problem for you, then a balance transfer is a great idea. Making one will enable you to trade in a high interest rate for one as low as 0% and will therefore not only save you a bunch of money, but also bring debt freedom to bear much quicker. You’ve got to find the right card though, so make sure to compare balance transfer credit card offers before applying.