- Is Balance Transfer of your personal loan a good idea?
- Under what conditions you should go for a Balance Transfer?
While taking a new personal loan people do their best to get the loan at the lowest possible interest rate and with minimum processing charges. But, very often they forget to check the possibility of further saving once the repayment of this loan begins. However, doing a balance transfer of your personal loan, which involves getting a new personal loan from a different lender to pay off the outstanding of your existing lender, could save a good part of your interest payout. There are several scenarios when a balance transfer could be beneficial for you.
When Interest Rate Difference is Significant
Interest rates vary widely across the lenders so it makes sense for you to keep comparing the interest rates. Additionally, if an interest rate is continuously coming down after you took your personal loan, you should make it a point to compare the latest interest rates. If others are offering significantly lower rates than what you are paying, you may consider the balance transfer option. A personal loan is a medium-term loan typically with a maximum tenure of 5 years. A difference of 1% or less may not bring remarkable saving. However, if the difference is more than 1%, it may save your hard earned money and you may consider the transfer.
When Your Loan is in its Early Part
It is the first half of the loan tenure during which a substantial part of EMI goes towards interest payment. For instance, if you have taken a loan at an interest rate of 14% p.a. for a tenure of 4 years then you need to pay more than 72% of the total interest dues during the first 2 years of the loan tenure. This means that if you go for a balance transfer in the second half of your loan tenure the net benefit may not be significant. However, in the first half of the tenure, it could bring good saving so you may mull over the balance transfer option to save on interest payment.
If your Savings are Higher Than the Charges
A lower interest rate is a good trigger to consider a balance transfer but it should not be the only criteria for taking the final call. Though you may be getting a lower interest rate but foreclosure charges of existing loan and processing charges of the new lender could make the transfer cost higher than the saving that you are making by a lower interest rate. Therefore, you have to take into account all such additional expenses. You should assess the net benefit of the balance transfer and if it is gainful, you should go ahead.
If There are Low Transfer or Foreclosure Charges
Many lenders with most competitive interest rates also have low processing fees. This makes the balance transfer more beneficial for the borrower. If you have an outstanding amount of ₹4 lakh and have a remaining tenure of 3 years, then by bringing down your interest rate from 15% to 11%, you can have a total saving of ₹2,7743. If you pay 3% of the outstanding (₹12,000) as charges towards foreclosure and processing fee, you can still save ₹15,243. Moreover, if your existing lender does not levy any foreclosure charge or the new lender charges a low transfer fee, you can save a bigger amount.
If There is an Employment-based Scheme
Lenders often offer lowest interest rates to salaried professionals working in some of the highly reputed organizations. If you are working in such an organization, you may check the availability of such an offer for your organization and consider a balance transfer. Many lenders come up with special offers for professionals like Doctors, Chartered Accountants and Architects to name some. If you are such a professional, you can utilize these special offers and go for a balance transfer. Similarly, as a self -employed individual if you find a special offer on a new personal loan, you may consider the balance transfer option.
When You Need Flexibility Such as Tenure Change, Prepayment & Top-up
Based on the changes in your monthly income and expenditure, if you wish to change the tenure of your personal loan, either by increasing it or decreasing it, and if your existing lender is not agreeing then you may go for a balance transfer to get tenure of your choice besides the possibility of lowering the interest rate. If you need the additional funds, a balance transfer may be a good way to get a top-up loan at a lower interest rate from a new lender and close the old personal loan.