The 3 Ws of Car Loan Balance Transfer on Your Fingertips
Last Updated : Feb. 18, 2019, 12:26 p.m.
The fact that the dream car brings a feel of luxury amongst individuals is simply undebatable. But hiding away from the stark reality of mounting EMIs and interest could play the spoilsport. Further, the value of cars depreciates over time, unlike other assets that see an appreciation in their value as the time goes on. While you can’t do much to the car valuation, getting the interest rates reduced is possible with a car loan balance transfer. This could result in significant savings if you use the option diligently. This article is an attempt to make you aware of the 3 Ws – ‘What’, ‘Why’ and ‘When’ – of car loan balance transfer. Let’s start reading these aspects without any further delay.
What is Car Loan Balance Transfer?
It’s a process by which you can transfer the existing car loan portfolio from one lender to another at lower rates of interest. The lower rates, a unique selling proposition (USP) of balance transfer, make most borrowers switch their lenders, further intensifying the tug war among the car financing companies across India. Transferring the existing loan portfolio could also come with a fee amounting to 1%-3% of the principal outstanding plus applicable Goods and Services Tax (GST).
Why Should You Opt for Car Loan Balance Transfer?
For the simple reason that it lowers the interest payment drastically over time. A car loan can run for a maximum of 7 years (new vehicles) and 5 years (used vehicles). And, if the loan carries on at higher rates for such a long period, you could lose sleep as well as peace although it may happen quite later. The balance transfer would, however, need an illustration of sort beyond words of support. Let’s calculate the benefits of transfer using a simple illustration below.
Example – You are availing a 5-year car loan worth ₹7 lakhs at 10.50% per annum. Two years have gone by since the time you started paying the loan dues. The table below shows the car loan repayment estimates as of now.
| Repayment Aspects | Estimated Figures |
|---|---|
| Original loan amount | ₹7,00,000 |
| Original loan tenure | 5 Years |
| Length of EMIs serviced so far | 2 Years |
| EMI payable at 10.50% interest rate | 15,046 |
| Loan outstanding at the end of 2 years | ₹4,62,910 |
| Interest paid so far @10.50% | 1,24,008 |
| Interest to be paid over the course of 5 years @10.50% | 2,02,744 |
Given your excellent repayment track record, a lender offers you a balance transfer facility at 9.35%. The balance transfer fee is 1% of the total outstanding plus 18% GST. Keeping this in mind, the fee comes as (1% of 4,62,910+18%) ₹5,462.34 (approx.). How will the proposed offer help curb the cost?
Now, there are two ways to look at it. One is to get the balance transferred for the remaining 3 years. Another one is to cut short the tenure to say 2 years. Let’s check the effect of balance transfer across each of the two tenure options and compare those with that of the repayment estimates without balance transfer.
| Balance Transfer Aspects | Balance Transfer for 3 Years (In ₹) | Balance Transfer for 2 Years (In ₹) |
|---|---|---|
| Balance transfer amount | 4,62,910 | 4,62,910 |
| EMI payable @9.35% | 14,796 | 21,222 |
| Difference in the car loan balance transfer EMI over the existing EMI | 250 less than the existing one (15,046-14,796) | 6,176 more than the existing one (21,22-15,046) |
| Interest payable @9.35% | 69,744 | 46,426 |
| Interest paid so far @10.50% | 1,24,008 | 1,24,008 |
| Sum of interest payable and interest paid so far | 1,93,752 | 1,70,434 |
| Balance transfer fee | 5,462.34 | 5,462.34 |
| Total outgo on balance transfer | 1,99,214.34 | 1,75,896.34 |
| Savings on balance transfer | 3,529.66 (2,02,744-1,99,214.34) | 26,847.66 (2,02,744-1,75,896.34) |
As you can see the total interest payment reduces by as much as ₹26,847.66 with a 2-year balance transfer compared to ₹3,529.66 on availing it for 3 years. Yes, the EMI amount surges to almost 1.5 times the existing one by carrying the loan for a shorter tenure of two years. But, if you can pay such an amount without much fuss, there’s no point extending the loan tenure beyond two years.
When Should You Go for Car Loan Balance Transfer?
Although a car loan balance transfer is beneficial in more ways than one, you still need to keep in mind the following before taking a plunge.
When the Difference in Interest Rates is a Minimum of 0.50%-0.75% – For you to make most of the balance transfer, the new lender must offer the facility at interest rates lower than the existing one by a minimum of 50-75 basis points (100 basis points = 1%) i.e. 0.50%. A differential greater than 0.50%-0.75% would only reduce the cost further.
When There’s a Minimum or No Balance Transfer Fee – The balance transfer fee may not grab your attention as much as the interest rate. But getting it reduced to the lowest extent possible is an endeavour you must not shy away from. If possible, look for zero balance transfer fee offers.
When the Existing Loan Tenure is Some Time Away – If your existing loan is some months or a year away from getting over, you should then resist transferring to another lender. It’s because the savings would be very marginal to say the least. The benefits of balance transfer would be more when the existing loan has run for less than 50% of the original tenure.
So, if you are availing a 6-year car loan, look to switch the portfolio after having serviced the EMIs for 2-3 years. Afterward, if you do, the savings won’t be much to cheer about. The illustration shown above underpins the importance of timing the balance transfer.
Now that you know the ‘What’, ‘Why’ and ‘When’ of car loan balance transfer, let’s check out the documents you need to submit to make it happen.
Documentation
Do submit the following documents for a hassle-free approval.
- A quote from the existing lender regarding the principal outstanding, the tenure for which the loan EMIs are serviced at the prevailing interest rate
- No Objection Certificate (NOC) from the existing lender, RTO and the car insurer
- Identity Proof – PAN Card/Aadhaar Card/Passport/Driving License/Voter ID
- Residence Address Proof – Aadhaar Card/Passport/Driving License/Voter ID/Utility Bill Copy
- Income Proof – Latest Salary Slips (Salaried), Last 2-3 Years ITR, Profit & Loss A/C and Audited Balance Sheet (Self-employed)
- Bank Statement for the Last 3-6 Months
- Passport Size Photographs