When Should You Avoid a Personal Loan Balance Transfer?
Last Updated : Nov. 23, 2020, 5:19 p.m.
It’s always a joy to see a lender approaching you for a personal loan balance transfer and saving you handsome money. The balance transfer is a process by which you can switch your personal loan to another lender at a lower rate of interest. Since the personal loan interest rate can be in the high double digits, switching your portfolio to another lender at a lower rate will reduce your overall outgo. That said, you should not do it just for the sake of it! There are situations when a balance transfer does not yield you much, which you will read in this post. Let’s get started!
Situations When You Can Say ‘NO’ to a Personal Loan Balance Transfer
A personal loan balance transfer won’t yield if you don’t do it at the right time, when the offered interest rate is not that lower than the present one, etc. And when you read these situations in detail, you will get to know our point even better. So, let’s read all these without any further delay.
When You Don’t do a Personal Loan Balance Transfer at the Right Time
As they say, do the RIGHT thing at the RIGHT time to get the RIGHT result, the same thing applies to a personal loan balance transfer too! If you don’t do a balance transfer at the right time, you could have very little savings. So, you won’t enjoy doing the formalities associated with the same. But what is the WRONG time for a Personal Loan Balance Transfer? Well, it would be like when the loan has very little time left.
So, if your personal loan is for 5 years and has completed 4 years of its journey, you better not do a balance transfer. The savings won’t be much as you would already have paid a huge chunk of interest till now. And, with balance transfer charges, the savings would reduce further. The Right time for a Personal Loan Balance Transfer would be when the loan has covered 50% or less than that of its credit journey.
When the Offered Interest Rate on a Personal Loan Balance Transfer is not That Lower
Yes, a personal loan balance transfer deal will come at a lower rate of interest than the existing one. But how much lower the offered rate is will matter eventually. So, if your existing personal loan is running at 18%, don’t accept a balance transfer at 16%. Look for a deal where the interest rate would be around 11-13%, if not any lesser. A slightly lower rate will decrease the monthly installment and overall interest payment, but that won’t be much. Whereas, if you execute the deal at a rate lower than the existing one 5-6%, the savings will be substantial. Let’s understand with an example below.
Example – Your personal loan of INR 8 lakh at 18% has been running for 2 years. It still has another 3 years left. Now, if you are offered two balance transfer opportunities at 16% and 12%, how much more will you gain from the latter? Let’s find out!
| Personal Loan Details | Balance Transfer Cost Estimates When the Offered Rate is 16% (In INR) | Balance Transfer Cost Estimates When the Offered Rate is 12% (In INR) |
|---|---|---|
| EMI Payable on INR 8 Lakh at 18% | 20,315 | 20,315 |
| Interest Payable on INR 8 Lakh at 18% | 4,18,885 | 4,18,885 |
| Interest Paid Till Now | 2,49,474 | 2,49,474 |
| Present Outstanding Loan Balance | 5,61,919 | 5,61,919 |
| EMI Payable After Balance Transfer | 19,755 | 18,664 |
| Interest Payable After Balance Transfer | 1,49,276 | 1,09,976 |
| Interest Paid Till Now + Interest Payable After Balance Transfer | 3,98,750 | 3,59,450 |
| Savings | 20,135 | 59,435 |
You could see a much higher savings of INR 59,435 when choosing a balance transfer offer at 12% compared to INR 20,135 when switching at an interest rate of 16% per annum.
High Balance Transfer Charges Could Kill the Joy!
The savings you see above will see a deduction of the charges associated with a personal loan balance transfer. So, the savings will reduce by some amount. Even then, the 12% offered rate will have substantial savings for you. But some lenders can charge much on a balance transfer, so you need to avoid switching your loan there.
Balance transfer comes at a flat fee or a certain percentage of the transferred loan balance. At the same time, your existing lender could also charge on the foreclosure at 2-5% of the outstanding loan balance plus Goods and Services Tax (GST).
So, factor in the charges and then see how much you will save in the end. If that comes as a good sum, a balance transfer will make sense. Otherwise, continue to service the loan at the present pace.
These are some situations when you can avoid a personal loan balance transfer. Now let’s look at how you should calculate the repayment estimates of a balance transfer.
How to Calculate the Repayment Estimates for a Balance Transfer?
You can use the Personal Loan EMI Calculator to calculate the repayment estimates for a balance transfer and choose the best option for yourself. The calculator is available online, so you need to enter the loan amount, interest rate and tenure to ascertain the Equated Monthly Installment (EMI) and interest payable on a balance transfer. Doing such calculations will help you plan a balance transfer better.