Balance transfers or transferring the outstanding amount of a loan to another lender is common practice. While the process is no different from availing a regular personal loan, you will be borrowing just the outstanding portion of your original loan from a different lender, on slightly favorable repayment terms. Ideally balance transfers are bundled with lower interest rates and extended loan terms, which means you get to pay lower monthly installments or EMIs. Your new loan is now more affordable or is it?
Why opt for Balance Transfer?
There are several reasons why people opt to transfer their personal loan balance such as:
- Better interest rates – Interest rates on Personal loans are higher than other types of loans. You may get better interest rates than what you are paying. You may also choose from fixed or flexible interest rates to arrive at a lower EMI.
- Negotiable loan term – The Loan tenure is usually negotiable. Opt for short-term and higher EMIs to pay off the debt in full at the earliest. Settle for a longer term if you do need more cash on hand.
- Affordable EMIs – Working with the above 2 parameters EMIs become more affordable.
- Dissatisfied with services of the current lender – Switching to another lender is often the best option if you aren’t very satisfied with service levels of your lender.
- Availability of top-up loans with minimum documentation – Lenders are more willing to top-up your balance transfer loan if you have a high credit score. The time and effort lost in documentation, verification etc., are greatly reduced.
- Additional perks such as free accident insurance – Personal loan balance transfers are usually clubbed with additional perks, some of which may prove useful.
- Features such as waiver of processing fees, or even the last EMI – Select borrower-friendly features too are part of the loan offer.
It is important for borrowers to note that financial institutions and banks are after all lenders, competitors in the same business and they are not going to offer lucrative deals without a reason. If you’ve taken a personal loan from a lender and have paid the monthly installments on time, automatically your credit rating/scores increase, indicating that you are committed to repaying the loan on time. It is your credit rating that eventually gets you better offers when it comes to personal loan refinancing. Lenders are usually more willing to loan money to customers with a track record of timely repayments.
Though pretty straight forward, transferring a personal loan balance from one lender to another is not that simple. The decision must not be based on the interest rates alone or other perks that usually go along with loan refinancing offers.
There are quite a few other factors that you should consider before applying for a balance transfer personal loan.
Actual cost of the personal loan
Lower interest rates are just one benefit of personal loan balance transfers, that too only if you are creditworthy. There are several other charges that are associated with balance transfer and you will have to check how much you are actually going to pay for the entire process.
Loan processing fees
There is a specific fee charged for processing a loan application, even if balance transfer. In this case, you will be applying for a personal loan from a new lender for the outstanding amount of your personal loan from a previous lender. The new lender may, however waive processing fee.
Also processing fees can either be a fixed amount or a percentage of the total loan amount. The fee can vary based on other parameters as well such as your occupation.
As you will be closing your personal loan well-before its full tenure, your current lender is bound to collect pre-closure charges. These are bound to be hefty especially in cases of balance transfer.
Other charges as applicable such valuation and stamp duty are likely as well.
It is a must that you ascertain all charges applicable to arrive at the expenses you will incur in transferring the loan balance. Is the transfer option still beneficial?
Total cash outflow
Next aspect that you need to focus on is the total amount you are going to pay up to settle your personal loan. It is a known fact that personal loans attract high interest and typically borrowers opt for balance transfers to benefit from better interest rates that make EMIs more affordable. The loan amount is just the outstanding of your original loan. This automatically means EMIs are already lower. In such cases it can get tempting to extend the tenure of the new loan to ensure you have more cash on hand today. But you may actually land up paying a lot more (in interest) than what you borrowed when you finally settle the loan. Compare the current EMIs and affordability with the offer and switch only if have to. Getting rid of the debt as early as possible must be your objective, provided you can afford the current EMIs.
Collateral and loan value
A majority of personal loans are unsecured loans that do not require any collateral. If you have taken a loan against your property (house/land) and wish to transfer personal loan balance, make sure the value of loan justifies the collateral value. You are now borrowing just the balance amount of your original loan, but from a new lender. For instance, if you borrowed 10 Lakh rupees from Lender A against your land/home, and have paid back Rs.5 Lakhs, you do not have to pledge your property to borrow the remaining 5 Lakhs from Lender B. Note that your property is worth more than the loan amount!
Invariably lenders will throw in lucrative features to attract borrowers looking for better loan deals. While you should act on such offers promptly to grab a good deal, you must also check if the additional features are something that you require or can afford.
For instance a free credit card or even a top-up loan in effect is also some form of debt that you will voluntarily bear if you do not check the offer.
Top-up loans at better terms (interest rates/tenure) are a boon if you really need the additional money and can afford to repay the debt. However it is not wise to over-borrow just because funds are available.
Do not fall for freebies for nothing is really free!
Allied bank accounts
Lenders usually require borrowers to open a new savings bank account to route the loan amount and automatically collect monthly EMIs as well. You must check what transaction facilities are available with the account, charges if any, payment modes accepted for EMIs and other details related to loan-specific bank accounts to operate the account without hassles.
Last but the most important aspect to consider is the fine print as well as the terms and regulations of the loan. You must be able to understand each and every condition, term and requirement to avoid any nasty/costly surprises later. Terms and conditions are bound to vary from one lender to another and may be interpreted differently as well. A bank may solicit fixed deposits or suggest other services that you may have to avail to get the loan. When in doubt, ask for clarifications and make well-informed decisions. After all it is you who will be shouldering the burden of debt.
As far as loans are concerned be it Personal or other types of loans, availing them from the bank at which you have an account or regularly transact is often the most ideal option. The staff is familiar with you, your financial status, credibility and transaction patterns, and you to some extent familiar with the way your bank works. Being a regular customer, you are bound to receive better attention and valuable guidance in choosing the right loan product and greater chances of getting funds cleared as well.
Personal Loan Refinancing – How it works?
As noted earlier getting another Bank or Financial Institution to refinance or takeover an outstanding personal loan involves just a few steps. All you need to do is to
- Submit a request for loan transfer to your current lender.
- Obtain a consent letter, no-objection certificate and a statement stating the outstanding amount from the lender.
- Select a lender to refinance your loan and present these documents for consideration
If the new lender is willing to take over your personal loan, they will release the amount to foreclose your existing personal loan. Your loan account and documents get transferred to the new lender who will process the refinancing as a fresh loan – all formalities and charges likely to apply unless any exceptions have been promised.
While the process is deceptively simple, there is quite a lot of ground work to cover to ensure that the switch actually proves beneficial in the long run. Getting rid of debt or living with it depends on your economic condition, financial needs and the ability to balance income and expenses. Do make sure to opt for the best loan refinancing option though.