A loan balance transfer can help reduce the cost of a personal loan in case you are stuck with an exorbitant interest rate. You are free to switch to a different lender, but there are financial implications that you need to watch out for. While most banks willingly encourage balance transfers as they serve to increase business and expand the customer base, it is the responsibility of borrowers to ensure that they don’t land up paying more interest in the process.
Let’s take a look at few pointers that can help you decide if the switch is really worth the hype.
Ascertain the need for balance transfer
Start by asking yourself if you really need to transfer the outstanding balance of your personal loan to another lender. You could consider the alternative if:
- the current interest rates are way higher that prevailing market rates
- you are not able to cope up with monthly EMIs and would like to settle for something lesser
- you want to switch from a fixed interest rate to a flexible one that is responsive to market changes
Assess the Impact
Switching or rather transferring the outstanding loan to a new lender has its own consequences, irrespective of your reasons for doing so. It is therefore necessary for you to assess the impact of the decision, financial and other aspects as well.
Lenders definitely will entice customers with lower interest rates on transferred loans, but will that alone reduce the cost of the loan?
You’ll need to factor in the processing fees plus pre-closure / pre-payment charges and other charges likely to be incurred during the process. Consider balance transfer only if prepayment charges do not exceed the earnings by way of lower interest rates.
The new lender will pay off the current personal loan and offer you a fresh loan for the outstanding amount, preferably at lower interest rates and a longer loan tenure that will lower your EMI. Freebies such as credit cards or accident insurance too may be on the cards.
What you need to understand is that an extended loan period simply means you’ll be repaying more money than (way beyond) what you originally borrowed. With newer interest rates being lower, you also have option to settle for a shorter loan term based on the maximum EMI you can shell out. That way you are likely to get out of the debt faster and save quite some money on interest.
Another threat is the flexi interest rate, which may not always work in your favour. Get professional advice and brush up on the fundamentals to avoid unnecessary cost overheads when opting for floating rates.
The Hidden Advantage
Apart from the evident monetary benefits of transferring a personal loan, there may be quite a few hidden advantages you’ll probably miss out on when you switch lenders.
If you’ve availed a personal loan from the bank where you hold a savings account then you already are an esteemed customer. You probably are familiar with the processes, are on cordial terms with the staff and even know the manager, may get a faster response to queries or requests and also receive necessary tips and guidance related to financial matters. It may take a while for you to get familiar and build a good rapport with the new lender to achieve the comfort levels experienced in transacting at your bank.
But then, if transferring the loan to a new lender does actually prove beneficial and services match your expectations do opt for a best deal that not only helps reduce EMI and clear the debt but also keeps costs contained!