When is the Right Time to do a Personal Loan Balance Transfer?
Last Updated : Oct. 7, 2020, 5:46 p.m.
Individuals opt for a personal loan to fulfill their different needs. But sometimes due to a higher interest rate, the loan repayment becomes a burden for borrowers. One of the ways by which you can ease this burden is by opting for a Personal Loan Balance Transfer facility. With this facility, a borrower can reduce his or her Equated Monthly Installments (EMI) as well as Overall Interest Outgo. But there is a common question among customers who are looking to ease their loan repayment burden — When is the right time to do a personal loan balance transfer?
Yes, a fair percentage of people are unaware of the right time for a balance transfer facility. With this facility, customers can transfer their outstanding principal balance to some other bank at lower interest rates. But the important thing is to know when a customer should go for a personal loan balance transfer? Some of the ideal situations would be when a customer is getting much lower interest rates than current ones, when there is a substantial loan tenure left and when a customer has to make some additional expenses.
We will explain all these situations in this article so that you can understand better. Keep reading!
Right Time to Go for a Personal Loan Balance Transfer Facility
The importance of identifying the right time to do a personal loan balance transfer is quite crucial for any borrower’s finances. We are explaining some of the ideal situations for a personal loan balance transfer. Let’s start!
When You Get Interest Rates Lower than Existing Rates by At Least 4-5%
The first and foremost thing to keep in mind when going for a personal loan balance transfer is the interest rate that you are getting from another lender. The ideal situation to go for this facility will be when you are getting interest rates lower than the existing ones by at least 4% to 5% per annum. Otherwise, you would not be able to save much in terms of EMI and overall interest outgo. Let’s say your current personal loan interest rate is 18.50% per annum, you should opt for a Balance Transfer if you are getting a new interest rate of 13.50% – 14.50% per annum or less.
To ensure this, you should check with the lender to get the lowest interest rates possible. A good credit score (750 or above) can be handy as lenders are more likely to provide a lower rate to such borrowers. Lower interest rates will help borrowers ensure maximum savings on a personal loan. Let’s understand this with an example.
Siddharth applied for a 5-year personal loan around two years ago at an interest rate of 18.50% per annum. Now after two years, he wants to apply for a Balance Transfer facility. Because of Siddharth’s excellent repayment behavior, he has a credit score of 780, which could help him get a lower interest rate of 13.50% per annum than his current rate. So, to know how much he can save, let’s look at the below table that has the required calculations.
| Loan Aspects | Details |
|---|---|
| Existing Loan Amount | INR 8 lakh |
| Interest Rate | 18.50% per annum |
| Tenure | 5 years (60 months) |
| EMI at the current interest rate of 18.50% per annum | INR 20,533 |
| Estimated Interest Outgo at 18.50% per annum | INR 4,31,978 |
| Interest Paid till now ( 2 Years ) | INR 2,56,826 |
| Outstanding Balance at the end of 2 years | INR 5,64,035 |
| EMI at the new interest rate of 13.50% per annum | INR 19,141 |
| Interest Outgo at the new interest rate of 13.50% per annum | INR 1,25,030 |
| Interest Paid till now + Interest for the remaining 3 years | INR 3,81,856 |
| Estimated EMI Saving | INR 1,394 (20,533 - 19,141) |
| Estimated Interest Savings | INR 50,122 ( 4,31,978 - 3,81,856) |
You can see from the above table that Siddharth can save INR 1,394 per month on the EMI amount and around INR 50,000 on the Interest amount when doing a balance transfer at 13.50%. So, when you go for a personal loan balance transfer, ensure you have got a substantially lower interest rate.
When There is a Lot of Time Left for Your Loan to Get Over
Customers can opt for a personal loan for a short period ranging from 12 to 60 months. For any borrower, the ideal time to do a personal loan balance transfer is when there is a lot of time left for your loan to get over. The reason: the interest outgo tends to be on the higher side during the initial years of the loan tenure. So, if you want to ensure maximum savings on the overall interest amount, you should opt for a balance transfer facility in the initial years of your loan — ideally 1 to 2 years of your loan journey. When you switch to a lower interest rate during this time, you can save a substantial amount as the interest amount on your principal outstanding amount will be high.
Let’s understand this with an example. Suppose an individual has taken a 5-year personal loan of INR 6 lakh at an interest rate of 17.50% per annum. According to these details, the interest outgo at the end of 12 and 24 months is INR 1,31,477 and INR 1,10,633, respectively. This amount starts to reduce as the tenure goes forward; in the 4th year, the interest outgo will be INR 56,439.
So, you can see that it would not be beneficial for you to opt for a personal loan balance transfer facility when you have only 1 or 2 years left in your tenure. Otherwise, you would not be able to save the maximum amount on both EMI and interest amount.
When You Require Some Additional Funds
There could be a situation when you have to do some extra expenses. For this, you will need some other loan over and above the existing loan amount. In these situations, you can go for a Personal Loan Balance Transfer. You must be thinking how? Well, several lenders offer a top-up loan facility after you transfer your outstanding principal balance to them. This top-up loan amount will be over and above the existing loan amount. With this additional loan amount in your hand, you can fulfill your extra expenses without any worry.
But before offering a top-up loan on your existing personal loan, lenders check your past repayment behavior and credit score. The chances to get a top-up loan are high for an individual with a good credit score (750 or above) as compared to an individual with a poor score. The lender will make the final decision about the eligible top-up loan amount.
When You are Handling More Than One Debt
One of the other ideal situations to opt for a personal loan balance transfer is when you have more than one debt to handle. As we explained in the previous points, a personal loan balance transfer helps customers ensure maximum savings. So, let’s say a customer has some other loans or credit card EMIs to handle, this savings can help them manage their additional debts.
One more thing you can do is pay off your personal loan before the scheduled time by keeping the same EMI amount as before. So, if a person also has a Home Loan along with a personal loan, he or she can solely focus on the home loan after clearing off the personal loan. If you choose to reduce your EMI amount after the personal loan balance transfer, you can use the ‘extra saved amount’ towards your other debt. So, if you have more than one debt to handle and you want to manage them efficiently, a personal balance transfer could be a wise choice.