- Seeking to reduce interest burden on personal loan? Opt for balance transfer at lower rates
- Liquidation of low yield investments can also reduce the burden greatly
It won’t be wrong to say that many take personal loans to unleash the happy moments of marriage and travel or to tide over the uncertainties of medical emergency and other contingencies. That sums up the utility of a personal loan in one’s life. But personal loans can come at higher rates as you can avail the same without providing any security. The higher rates could increase the repayment burden for you. It can get reduced, though, and thus bring a smile on your face. So, if you are finding it hard to make the loan payments, it’s time you ease the burden by taking a cue from the recommendations highlighted in this article.
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Request the Lender to Lower the Interest Rate
You should ask the lender to reduce the rates. The lender can do so if you have a solid repayment track with no spot of default. The reduction in rates will decrease the Equated Monthly Installment (EMI) and the interest outgo.
Opt for a Balance Transfer If the Existing Lender Refuses to Lower the Rates
If the existing lender does not lower the interest rates, it’s time you search outside and find a lender that can take over your existing loan at lower rates. This is a common practice among borrowers to reduce the repayment burden. However, this can come with a fee at up to 2-4% of the transferred balance. So, the key lies in getting the deal at the lowest fee. If possible, look for zero fee offers to maximize your savings. Let’s check out the example below to understand the benefits of the balance transfer.
Example – Ravi Katyal availed a 5-year personal loan of INR 5 lakhs 2 years ago. He has been paying an EMI of INR 12,426 of at an interest rate of 17% per annum. If Ravi continues to pay at this rate, he would end up paying a total interest of INR 2,45,577 by the time the loan gets over. He has so far paid an interest of INR 1,46,768 and is left with an outstanding balance of INR 3,48,536. If Ravi gets a balance transfer deal at 13% given his solid repayment track, how much will he benefit from the transaction? Let’s find out in the table below.
|1||Original Loan||INR 5,00,000|
|2||Present EMI @17%||INR 12,426|
|3||Interest Paid Till Now||INR 1,46,768|
|4||Interest to be Paid Over 5 Years @17%||INR 2,45,577|
|5||Outstanding Loan Balance After 2 Years||INR 3,48,536|
|6||New EMI @13%||INR 11,744|
|7||Savings in the EMI||INR 682|
|8||Interest to be Paid Over the Remaining 3 Years||INR 74,232|
|9||Interest Paid Till Now + Interest to be Paid Over the Remaining 3 Years||INR 2,21,000|
|10||Savings (4-9)||INR 24,577|
Note – The mathematics shown in the table would apply to the first case as well, if the existing lender agrees to reduce the interest rates.
If Ravi grabs a zero balance transfer fee offer, the savings of INR 24,577 would be kept in tact. However, if the new lender charges a fee, then Ravi must check the savings to be made after paying the charges. Only when the savings post deduction of the fee comes substantial shall he avail the balance transfer option.
Formalities Required in Personal Loan Balance Transfer
The balance transfer is executed by completing the necessary formalities.
- Request the existing lender to issue you a No-objection Certificate (NOC) with respect to the loan transfer to the new lender
- Also ask the existing lender to present you with a statement showing the loan paid so far, the outstanding loan balance, the rate of interest charged, the remaining tenure left, etc.
- Present these documents to the new lender to process your balance transfer application
- The new lender would go through the repayment track before approving this loan arrangement
Pay from Your Low Yield Investments
You may have invested in products such as fixed deposits, recurring deposits, etc. The average return from these products could be around 6%-8% per annum, hardly enough to deal with the prevailing inflationary scenario. The returns shorten further post the tax deduction. So, it would be advisable to take something out of these investments to pay a certain portion of the loan to reduce the outstanding balance and the interest outgo.
Example – You are investing INR 5,000 in a 5-year recurring deposit on a monthly basis. The maturity amount would be around INR 3.5 lakhs on a total investment of INR 3 lakhs at an assumed return of 6.75% per annum. Instead, if you have been investing the same INR 5,000 monthly in mutual funds via a Systematic Investment Plan (SIP), you could have hoped for a corpus of INR 4,24,017 over 5 years, assuming an annual return of 13%.
Assuming your RD to have completed 4 years, the approximate corpus would be around INR 2.7 lakhs. You can thus take out some of the RD proceeds to reduce the personal loan outstanding and the interest payment.
If you are servicing a 5-year personal loan of INR 4.5 lakhs at 15% interest rate, you must be paying an EMI of INR 10,705, which could lead to a total interest payment of INR 1,92,328 over the entire debt course. Now that you have paid the EMIs for 2 years, the outstanding balance stands at INR 3,08,823. If you pay INR 70,000 out of the RD proceeds, the loan would reduce to INR 2,38,823. The benefit of the reduced loan amount is shown in the table below.
|1||Original Loan||INR 4,50,000|
|2||Present EMI||INR 10,705|
|3||Interest Paid Till Now||INR 1,15,755|
|4||Interest to be Paid Over 5 Years @15%||INR 1,92,328|
|5||Outstanding Loan Balance After 2 Years||INR 3,08,823|
|6||New Outstanding Loan Balance Post the Payment of 70,000 from RD||INR 2,38,823|
|7||New EMI||INR 8,279|
|8||Savings in the EMI||INR 2,426|
|9||Interest to be Paid Over the Remaining 3 Years||INR 59,217|
|10||Interest Paid Till Now + Interest to be Paid Over the Remaining 3 Years||INR 1,74,972|
|11||Savings (4-10)||INR 17,356|
Tips for Prospective Borrowers
The tips suggested above were for customers who are already servicing personal loans. For those who are yet to avail this loan, they must compare the different interest rates before choosing the one that lowers the repayment burden. They can gauge the effect of interest rates by checking the personal loan EMI calculator, which sums up the repayment in a few seconds. The calculator is available online to make it easy for you. Just enter the loan amount, interest rate and tenure tenure in the calculator, which will then show the EMI and interest outgo over the course of a loan.