In the Indian financial market, balance transfer of loans has probably been one of the most useful features introduced to allow borrowers to beat market rate volatility. With the increasing popularity of personal loans, it has become more important than ever to understand the terms associated with personal loans.
A balance transfer is one of the best facilities offered by lenders to ease the repayment burden on the borrower without bearing a loss. Many lenders offer you an instant loan for a balance transfer of your existing loan. However, before opting for a balance transfer you must understand the pros and cons of this financial move.
In this blog, we bring to you a detailed explanation of the impact of balance transfers on personal loan interest rates.
What is a Personal Loan Balance Transfer Facility?
A personal loan balance transfer facility is more accurately a refinancing facility. It allows you to transfer the outstanding balance of your loan liability to a new lending institution offering modified terms of service. A low rate of interest is often a typical perk of such refinancing. Other perks include extended tenure, better customer service, top-up amount and more.
When availing this facility, you need to undertake a series of procedures related to the loan, foreclosure of the loan account with the current lender and loan refinancing processing with the new lender being the two most popular processes.
You can opt for a loan balance transfer facility at any time during the repayment tenure after having completed the set number of EMI payments as agreed to by your lender. However, there are certain fees and charges associated with this process, which you must calculate thoroughly before submitting the papers.
What is the Impact of Personal Loan Balance Transfer on Its Interest Rate?
The impact of personal loan balance transfer on the interest rate and final loan liability can be measured with a detailed understanding of a few major aspects related to the refinancing processing. Below are listed the pointers that help understand this final impact.
- Reduced interest rate
When you transfer your personal loan outstanding to a new lender offering a low rate of interest, it effectively brings down the final interest liability. This could be by as much point percentage of rate difference offered as reduction. This could make a huge difference if the remaining loan tenure is long. However, do consider the charges that you would have to pay to your existing lender and your new lender.
- Consider the tenure
The final interest liability on your personal advance critically depends on the timing when you choose refinancing. The earlier you make the refinancing decision and switch to your new lender, the higher your interest savings would be. Contrarily, if you delay your decision to refinance your advance at the new rate, the final savings would be reduced. It does not make much sense to transfer your loan if you only have a few months left.
- Fees and charges
Another aspect that you need to consider when availing a loan balance transfer facility is the fees and charges involved in the process to assess the final savings on your loan. Typically, when availing the refinancing facility, you need to pay two standard fees as per the lender rates applicable. The first would be the foreclosure fees that you need to pay to your existing lender for closing the loan account. The second would be the processing fee paid to your new lender for opening a new account. You need to assess the difference between the total of these fees paid and the total savings made out of interest rate reduction to finally determine your refinancing decision.
When should you opt for a balance transfer?
Here are some situations in which a balance transfer to a new lender can make sense –
- If a new lender is offering a significant reduction in the interest rate.
- If you are dissatisfied with your current lender’s customer care support.
- If you want to extend the tenure of the loan to bring down your EMI burden.
With this detailed understanding of the impact of personal loan balance transfer on the rate of interest, it is only pertinent that you measure all the liability variables associated with the advance. For instance, you would need to consider the timing of availing the balance transfer facility to best optimise the interest savings as against the cost incurred in such a transfer. Also, you must maintain a clean history of EMI repayments to be eligible for a balance transfer.
You must also consider the reputation of the new lender, check the ratings and read customer reviews to ensure that you are choosing the right lending partner. Also, if the interest rate is the only factor for the balance transfer, then consider renegotiating with your existing lender.