Importance of Credit Score When Doing a Balance Transfer of Different Loans
Last Updated : Oct. 6, 2020, 1:42 p.m.
Whenever the loan payment gets tough due to a higher interest rate, we think of switching our loan to another lender at a lower rate using the balance transfer process. It helps reduce both the Equated Monthly Installment (EMI) and overall interest outgo. But getting a balance transfer offer from the lender will depend mainly on your credit score. A balance transfer will be like a fresh loan for the new lender, which will like to check your creditworthiness before approving the deal.
So how much credit score do you need to get the balance transfer approved? Well, this could vary depending on the type of loan. Let’s read this post to know the required credit score when doing a balance transfer of different loans.
Why Do the Credit Score Criteria Vary When Doing a Balance Transfer of Different Loans?
The credit score criteria vary across balance transfers of different loans. Secured loans like a home loan will have slightly lenient criteria compared to unsecured loans like a personal loan. In a secured loan, the mortgaged asset remains with the lender, hence the credit norms pertaining to a balance transfer here can be lenient than an unsecured loan where no mortgaging happens.
Before going any further, it will be better to know something about a credit score if you are new to credit. A credit score, which is prepared by credit bureaus such as CIBIL , Experian, Equifax and CRIF High Mark, ranges from 300 to 900 in India. The closer you are to 900, the better it is for you.
How Much Credit Score Do You Need to Get Your Personal Loan Balance Transfer Executed?
A personal loan comes with a greater degree of credit risk for the new lender. So, you need a credit score of 750 and above before getting your personal loan balance transfer application approved. In case it is below the said level but remains above 700, the balance transfer request can still be accepted. Maybe the personal loan interest rate will be touch higher in that case.
But When Will a Personal Loan Balance Transfer Benefit You the Most?
A personal loan balance transfer will fetch you maximum benefits when the offered rate of interest is substantially lower than the rate at which you are presently paying a loan. As the balance transfer comes with a fee too, getting this done at the lowest possible rate should be your priority. This is where a good credit score can come handy. Let’s take an example to check the difference a good score can bring to your savings when doing a personal loan balance transfer.
Personal Loan Balance Transfer
Example – Sameer and Akash applied for a 5-year personal loan of INR 7 lakh around 2 years ago. The rate of interest offered was 18% per annum. While Sameer’s outstanding repayment track gets rewarded with a credit score of 780, Akash had a few issues and his credit score was a shade above 700. While both of their balance transfer requests get accepted, Sameer is offered 11%, Akash gets a 14% interest rate deal. Should they agree to their respective deals, how much will they save? Let’s find out!
| Personal Loan Aspects | Sameer | Akash |
|---|---|---|
| EMI Payable at the Current Interest Rate of 18% | INR 17,775 | INR 17,775 |
| Interest Payable Over 5 Years @18% | INR 3,66,524 | INR 3,66,524 |
| Interest Paid Till Now | INR 2,18,290 | INR 2,18,290 |
| Outstanding Balance at the End of 2 Years | INR 4,91,679 | INR 4,91,679 |
| New EMI Payable @11% | INR 16,097 | - |
| Interest Payable @11% | INR 87,811 | - |
| New EMI Payable @14% | - | INR 16,804 |
| Interest Payable @14% | - | INR 1,13,280 |
| Interest Paid Till Now + Interest Payable Over the Next 3 Years | INR 3,06,101 | INR 3,31,570 |
| Savings | INR 60,423 (3,66,524-3,06,101) | INR 34,954 (3,66,524-3,31,570) |
The new lender could charge a balance transfer fee, which would reduce the savings a bit. But Sameer could still have significant savings on a balance transfer. Meanwhile, Akash should look for an even lower rate, and if he manages to get so, the balance transfer will yield more savings for him. In case he fails, he can opt for a deal at 14%.
Importance of Credit Score in a Home Loan Balance Transfer
As a home loan can run for as long as 30 years, you will get multiple balance transfer opportunities. Since it’s a secured loan, a balance transfer request can be accepted even if the credit score is 650 or slightly lower. But for getting a much lower rate on a home loan balance transfer, your credit score has to be much higher than that. If it happens, you could have massive savings. Let’s consider an example to find the difference in savings with two different credit scores.
Home Loan Balance Transfer & Save Big
Example – Ramesh and Shikha have been paying a 20-year home loan of INR 50 lakh each at 8.50% per annum for the last 3 years. While Ramesh gets an interest rate of 7.50% per annum due to his credit score of 800, Shikha gets a deal of 8.10% only as her score is 720. How will this impact their respective savings? Let’s find out!
| Home Loan Aspects | Ramesh | Shikha |
|---|---|---|
| EMI Payable at the Current Interest Rate of 8.50% | INR 43,391 | INR 43,391 |
| Interest Payable Over 20 Years @8.50% | INR 54,13,879 | INR 54,13,879 |
| Interest Paid Till Now | INR 12,36,382 | INR 12,36,382 |
| Outstanding Balance at the End of 3 Years | INR 46,74,300 | INR 46,74,300 |
| New EMI Payable @7.50% | INR 40,606 | - |
| Interest Payable @7.50% | INR 36,09,341 | - |
| EMI Payable @8.10% | - | INR 42,266 |
| Interest Payable @8.10% | - | INR 39,48,005 |
| Interest Paid Till Now + Interest Payable Over the Next 17 Years | INR 48,45,723 | INR 51,84,387 |
| Savings | INR 5,68,156 (54,13,879-48,45,723) | INR 2,29,492 (54,13,879-51,84,387) |
You could see Ramesh saving more than double that of Shikha on a home loan balance transfer . A much lower rate of 7.50% on a balance transfer has made it for Ramesh. He must thank his good credit score for giving himself the chance to achieve such savings.
Role of Credit Score in a Car Loan Balance Transfer
Even as borrowers don’t have the original car registration papers till the time the car loan is paid off fully, it doesn’t come under a secured loan. Because if someone defaults, the lender might struggle to recover the pending dues even when it decides to sell the vehicle. The depreciation can be massive in fixed assets like cars. So, the market value of cars could dip significantly. Hence, a credit score holds importance not only at the time of taking a fresh car loan but even when you look for a balance transfer.
Lenders will most likely approve the deal when having a credit score of 750 and above. As the car loan is given for a maximum of 7 years, it will be better to get it done when the original tenure is some 3-4 years away. Plus, the new lender should offer you a reasonably lower car loan interest rate. An example below will only guide you towards a fruitful car loan balance transfer.
Example – Both Deepika and Swara are paying the EMI of INR 13,281 for a 7-year car loan worth INR 8 lakh at a 10% interest rate. The loan was taken 3 years back. Now as they look to do a balance transfer, Deepika has an edge over Swara by getting a much lower rate of 8.20% compared to the latter who gets a deal of 9.30% per annum. The lower rate of Deepika is more due to a credit score of 775 compared to Swara’s 730. Let’s check how much these two could save should they go ahead with the deal.
| Car Loan Aspects | Deepika | Swara |
|---|---|---|
| EMI Payable at the Current Interest Rate of 10% | INR 13,281 | INR 13,281 |
| Interest Payable Over 7 Years @10% | INR 3,15,600 | INR 3,15,600 |
| Interest Paid Till Now | INR 2,01,757 | INR 2,01,757 |
| Outstanding Balance at the End of 3 Years | INR 5,23,643 | INR 5,23,643 |
| New EMI Payable @8.20% | INR 12,833 | - |
| Interest Payable @8.20% | INR 92,335 | - |
| EMI Payable @9.30% | - | INR 13,106 |
| Interest Payable @9.30% | - | INR 1,05,426 |
| Interest Paid Till Now + Interest Payable Over the Next 4 Years | INR 2,94,092 | INR 3,07,183 |
| Savings | INR 21,508 (3,15,600-2,94,092) | INR 8,417 (3,15,600-3,07,183) |
As you can see the savings for Deepika is almost double to that of Swara on doing a balance transfer. An interest rate difference of more than 1% on a balance transfer has made the difference between the two.
But Is a Good Credit Score Enough to Merit You a Balance Transfer?
Maybe not! Your overall repayment track could also be under scrutiny. The repayment track will consist of every credit account – different loans and credit cards. So even if you are looking for a home loan balance transfer, spots of payment delays in a personal loan or credit card can weaken your case. It may either result in a rejection or not so lower interest rate on a balance transfer.