Balance Transfer403 views
- Looking to switch your loan from the existing lender to a new lender?
- Do check the difference of interest rate between the old and new - Read this post to know more about it
People often use ‘Balance Transfer’ when they are servicing loans. It is nothing but a way by which you can reduce the burden of your running loan with lower interest rates. Yes, you can switch the loan from your present lender to the new one at a lower rate. This helps reduce the EMI and interest outgo on a loan. If you want to get rid of the loan faster, you can request the new lender to have the same EMI. This will not only reduce the loan tenure but also reduce the interest further. But lenders will charge you on a balance transfer which could be a flat amount or a certain portion of the transferred balance.
Almost every loan comes with a balance transfer facility. But while availing the same, one should see how much is the difference between the offered rate on balance transfer and the existing one. That will depend on the type of loan you are servicing. For short term loans, the balance transfer rate should be much lower than the existing rate. Whereas, in a long-term loan, even a small difference can ensure maximum savings if you pull off the deal carefully. But what exactly the difference should be between rates? You can know the same in this post, so read on!
Let’s Start with Home Loans
Home loan repayment can happen over a maximum of 30 years. Over such a long span, you will end up paying much more to the lender. However, you can reduce the liability if you choose the balance transfer. To ensure decent savings, it is important to choose a home loan balance transfer deal at an interest rate lower than the existing one by at least 0.25%-0.50%. If you find the rate even lower, you will have more savings. Also, you need to check the time when you do a balance transfer. You get maximum savings when the loan has quite a lot of time left before it gets over. If there are some 2-3 years left, a home loan balance transfer won’t provide you much benefits. Read the below example to understand the dynamics better.
Example – Both Shyam Khattar and Shashi Bhushan get a home loan of INR 50 lakh for 15 years. Interestingly, the home loan interest rate for the two is also the same i.e. 8.30% per annum. If Shyam does a balance transfer after 7 years and Shashi does it after 12 years, how will that affect their repayment scenario assuming both get the facility at 7.80%? Let’s check out the table below to know the same.
|Original Loan Amount||INR 50,00,000||INR 50,00,000|
|EMI Payable @ 8.30%||INR 48,653||INR 48,653|
|Interest Payable @ 8.30%||INR 37,57,462||INR 37,57,462|
|Interest Paid Over 7 Years @ 8.30%||INR 24,91,562||N.A.|
|Interest Paid Over 12 Years||N.A.||INR 35,51,726|
|Outstanding Loan After 7 Years||INR 34,04,745||N.A.|
|Outstanding Loan After 12 Years||N.A.||INR 15,45,755|
|EMI Payable on INR 34,04,745 @ 7.80% for 8 Years||INR 47,786||N.A.|
|Interest Payable on INR 34,04,745 @ 7.80% for 8 Years||INR 11,82,750||N.A.|
|EMI Payable on INR 15,45,755 @7.80% for 3 Years||N.A.||INR 48,296|
|Interest Payable on INR 34,04,745 @ 7.80% for 8 Years||N.A.||INR 1,92,896|
|Interest Paid Over 7 Years @ 8.30% + Interest Payable Over 8 Years @ 7.80%||INR 36,74,312||N.A.|
|Interest Paid Over 12 Years @ 8.30% + Interest Payable Over 3 Years @ 7.80%||N.A.||INR 37,44,622|
|Savings in Terms of EMI||INR 867||INR 357|
|Savings in Terms of Interest Outgo||INR 83,150 (37,57,462-36,74,312)||INR 12,840 (37,57,462-37,44,622)|
The savings will reduce further after the balance transfer fee is deducted by the new lender. So, our theory of going for a balance transfer when the loan is quite some time away from getting finished is proven right with the example.
What Should be the Difference of Interest Rate When it Comes to a Personal Loan Balance Transfer?
A personal loan runs for a maximum of 5 years. So, the balance transfer will benefit you significantly only when the new personal loan interest rate is at least 3%-4% lower than what you are servicing the loan at. Plus, you will have reasonable savings when you do a balance transfer within half the length of the loan tenure. An example below will help you understand the personal loan balance transfer math better.
Example – You applied for a 5-year personal loan of INR 5 lakh at an interest rate of 15% per annum. After paying the EMI without fail for 2 years, a new lender comes with a balance transfer offer at 11%. How will this offer benefit you? The table below gives you a clue.
|Original Loan Amount||INR 5,00,000|
|EMI Payable @15%||INR 11,895|
|Interest Payable @15% for the Whole 5 Years||INR 2,13,698|
|Interest Paid @15% Over 2 Years||INR 1,28,616|
|Outstanding Loan Balance at the End of 2 Years||INR 3,43,137|
|EMI Payable @ 11% Over the Next 3 Years||INR 11,234|
|Interest Payable @11% Over the Next 3 Years||INR 61,282|
|Interest Paid @15% Over 2 Years + Interest Payable @11% Over the Next 3 Years||INR 1,89,898|
|Savings in Terms of EMI||INR 661|
|Savings in Terms of Interest Outgo||INR 23,800|
The new lender will charge you a balance transfer fee, so the savings will reduce further. So, in the case of a personal loan, it is indicated by the example that the difference in interest rate has to be much more.
Similarly, for other short terms like a car loan, you should approach the balance transfer deal pretty much the way you are recommended to do so in a personal loan.