Personal loan balance transfer: How it works and who should go for it?

Are you worried about high interest rates on your personal loan taken in a hurry to meet your urgent financial requirements? There is help available if you haven’t paid too much in the form of EMIs (Equated Monthly Instalments). You can reduce the interest rate, renegotiate terms and even get a higher loan amount as well as tenure by opting for a personal loan balance transfer.

A personal balance loan transfer involves shifting the loan from your existing lender to a more favourable financier. Here is a primer on how it works and the benefits for borrowers.

How does a personal loan balance transfer work?

A personal loan balance transfer is a process where the borrower transfers the total outstanding loan amount from one lender to another lender. It typically happens when the new lender offers a lower rate of interest on the outstanding loan amount. The main purpose is to reduce the overall debt burden for the borrower.

While the new lender will pay off your existing loan, you have to pay charges such as prepayment fee to the existing lender. You will also have to pay a processing fee and other charges for the new loan. So, you have to carefully assess whether the savings on interest outweighs the expenses incurred on prepayment, processing and other charges. Do a cost-benefit analysis to find out how much you will stand to gain. If the savings are large enough, you can go for a loan transfer.

You should do proper research on different lenders comparing their interest rates, fee and loan terms before making the decision. You should make sure that you comply with the eligibility requirements of the new lender and then apply for the transfer by submitting the necessary documents.

Since, the transfer will be treated as a new loan, you have to submit documents for identity proof, address proof and income proof afresh. You have to get an NOC (no-objection certificate) and foreclosure statement from the existing lender. After completing these formalities, you have to sign the new loan agreement.

When can the borrower transfer the loan?

The borrower should have paid the loan for a minimum period of time to be eligible for a transfer. Most lenders require the borrowers to pay EMIs for 12 months on the existing loan to qualify. This way, they will also be able to assess the repaying capability of the customer.

It is better to transfer the loan in the middle of the repayment calendar. For instance, if the loan tenure is 60 months, you should transfer it before 30 months. Only then, you will be able to reap the benefits of the transfer.

“Transferring a loan at the end of tenure may increase the financial burden of the loan. It would be best to transfer the loan within the first half of the loan duration. If you have already repaid half of the loan, it is better to wait till the loan maturity,” according to Kotak Mahindra Bank.

What are the advantages?

The primary advantages of a personal loan balance transfer facility is that the rate of interest will come down, which in turn lowers the borrower’s interest burden through lesser EMIs. The new lender will typically offer a lower interest on the loan transfer.

The borrower can also renegotiate the tenure of the loan. You can either increase the repayment period of the loan or reduce it depending on your requirements. The EMI and interest burden will increase or decrease accordingly.

A personal loan balance transfer will not reduce just the interest burden as the borrower can also get better loan features during the process. Some lenders offer attractive benefits such as zero processing fee and waiver of the last EMI instalment. Most lenders also offer a top-up facility along with the transfer. This way, you will be able to get a higher loan amount at a lower interest rate.

Will the loan transfer affect your credit score?

A loan transfer would decrease your credit score as it would be shown as a new credit account in the credit report. Since there would be a lot of new enquiries for the new loan, this would also have an adverse impact on the credit score.

The opening of a new loan account would also result in changes in the credit utilisation ratio. But this is a temporary phenomenon. The balance transfer will positively impact your credit score if you manage your repayments well.

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.