Personal Loan Balance Transfer: How Does It Work and Who Should Choose It?

Are you worried about the high interest on your personal loan that you took out in haste to meet your urgent financial needs? There is help available if you have not overpaid in the form of EMIs (Equated Monthly Installations). You can lower the interest rate, renegotiate the terms and even get a higher loan amount and term by opting for a personal loan balance transfer.

A personal balance loan transfer involves shifting the loan from your existing lender to a more favorable lender. Here’s an introduction to how it works and the benefits for borrowers.

How does a personal loan balance transfer work?

A personal loan balance transfer is a process in which the borrower transfers the total outstanding loan amount from one lender to another lender. This usually happens when the new lender offers a lower interest rate on the outstanding loan amount. The main goal is to reduce the overall debt burden for the borrower.

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

You should thoroughly research different lenders and compare their interest rates, fees and loan terms before making a decision. Make sure you meet the new lender’s eligibility requirements and then request the transfer by submitting the necessary documents.

Since the transfer is treated as a new loan, you will need to provide proof of identity, address proof and income proof again. You must apply for a NOC (no-objection certificate) and foreclosure certificate from the existing lender. After completing these formalities, you must sign the new loan agreement.

When can the borrower transfer the loan?

To qualify for transfer, the borrower must have paid the loan for a minimum period. Most lenders require the borrowers to pay EMIs on the existing loan for twelve months to qualify. This also allows them to assess the customer’s repayment capacity.

It is better to refinance the loan halfway through the repayment calendar. For example, if the loan term is 60 months, you must transfer it before 30 months. Only then can you enjoy the benefits of the transfer.

“Transferring a loan at the end of the term can increase the financial burden of the loan. It is best to transfer the loan within the first half of the term. If you have already repaid half of the loan, it is better to wait until the maturity of the loan,” said Kotak Mahindra Bank.

What are the benefits?

The main benefits of a personal loan transfer facility are that interest rates will fall, which in turn reduces the borrower’s interest burden through smaller EMIs. The new lender usually offers a lower interest rate on the loan transfer.

The borrower can also renegotiate the term of the loan. Depending on your wishes, you can extend or shorten the repayment period of the loan. The EMI and interest charges will increase or decrease accordingly.

A personal loan balance transfer will not only reduce the interest burden as the borrower can also get better loan features during the process. Some lenders offer attractive benefits such as zero processing fees and waiver of final EMI installment. Most lenders also offer a top-up facility in addition to the transfer. This way you can get a higher loan amount at a lower interest rate.

Does the loan transfer affect your credit score?

A loan transfer would lower your credit score as it would show up on the credit report as a new credit account. Since there would be many new applications for the new loan, this would also have a negative effect on the credit score.

Opening a new loan account would also result in changes in the credit utilization 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 more than twenty years of experience. He has worked with several leading media organizations in the country and has been writing about mutual funds for almost sixteen years.