Can I draw funds from a personal line of credit to pay its own monthly "minimum payment"?

Question

I can guess the answer to this question, but I can't figure out why. So here goes...

I've got an unsecured line of credit with a limit $30,000.
The annual interest rate is 6%, compounded daily.
Every month, I am required to pay 3% of the balance as a "minimum payment".
There are no transaction fees.

What prevents me from paying the "minimum payment" from my savings account, then immediately withdrawing that same amount from the line of credit back into the savings account? The net effect is that I'm not really making a payment, so clearly this can't be possible... I just don't understand how the bank would be able to differentiate between this scenario, and the scenario where I legitimately need to borrow more money shortly after paying the minimum payment.

What am I missing?

UPDATE: I get the importance of paying back loans and limiting what you borrow. This is purely a theoretical question about whether the "minimum payment" requirement has any practical impact, or whether it can be circumvented using this mechanism. It sounds like the bank is putting on a show of encouraging you to pay back the loan, while not actually doing so.

littleadv · Accepted Answer

This is fine and can definitely be done. The bank will be perfectly fine with it since you're paying interest on the money, as long as they're confident that you can repay the whole (growing) balance. Of course, there's the issue of the credit limit which you'll eventually reach and then you won't be able to pull this off any longer.

Problems start when the bank either loses that confidence, or the credit line is term limited (like HELOC, for example) and comes to term. In either case, you'll be required to cover the balance, and especially in the first case - as a balloon payment. If they call on you when you do that - you will most likely go bankrupt, and the longer you keep doing it - the higher are the chances of that happening.

mhoran_psprep · Answer

Back of the envelope calculation:

30K limit, 5 year draw, 5 year post draw payback. Int 6% a year, 3% minimum payment.

Borrow 5K at the start of the draw period, make the minimum payment for the next 5 years. At the end of 5 years still owe approximately $1123, and have paid ~775 in interest.

Borrow 5K at the start of the draw period, make the minimum payment for the next 5 years but borrow the money from the line of credit. At the end of 5 years still  owe approximately $6711, and have paid ~1711 in interest.

The bank loves you. The balance grows instead of decreases. That growing balance become pur profit. Of course you are good for it, because you never came anywhere near the maximum limit of 30K.

This is a variation of somebody tapping the line of credit to invest it, then discovering that it is hard to make enough money to make it worthwhile.

Detailed scenario:

Starting balance: $5000 
Minimum payment: $150 
Interest: $25 
Post payment balance: $4875 
amount borrowed to make minimum payment: $150
New balance: $5025
repeat 59 more times.

NL - Apologize to Monica · Answer

This is basically the same as any other loan out there that defers payments. The bank doesn't care because your balance with them keeps going up along with their future profits when you pay that balance back. The only point where this becomes a problem for them is when you get to a point where your monthly income no longer supports the minimum payment required.

(BTW, this is basically a study of what the US Treasury is doing with the national debt and the annual budget deficit, but I will go over to politics.stackexchange.com before commenting on the wisdom of this.)

Can I draw funds from a personal line of credit to pay its own monthly "minimum payment"?

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