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A personal loan is an excellent option for a host of financial emergencies. Most top lenders in India now offer personal loans to eligible borrowers. But while a personal loan can indeed be a life-saver in many situations, it is one of the most expensive forms of loan. As compared to other types of loans, it has one of the highest interest rates.One effective solution to reduce the interest burden is to use the balance transfer facility. There are now several top financial institutions that offer this facility on personal loans.But is the balance transfer facility right for you? Understanding how it works will make it easier for you to decide. Take a look at four important things about this loan transfer facility-
1. What is Balance Transfer on Personal Loan?
A balance transfer is a process of transferring the outstanding balance of your loan to another lender. It can help you save a significant amount of money if the other lender is offering personal loans at a lower interest rate than your existing lender.While the primary reason that encourages borrowers to switch to another lender is lower interest rates, you can also use this facility if the other lender offers a longer repayment tenure, better services, or additional facilities.But do note that balance transfer might not be the best choice for every borrower. There are several cases where it’d make more financial sense to stick to your existing lender.
2. When Should You Not Consider Balance Transfer?
When you repay a loan, the EMI amount you pay is made up of two components- interest and principal. In the initial months/years of repayment, the interest component is higher than the principal component. So, let’s say if you’ve taken a personal loan with a 5-year tenure and already repaid the loan for 3 years, you’d have already paid a significant chunk of interest.It is very much possible that using the balance transfer facility in this situation won’t prove as beneficial as you might expect. Another important thing to note is that there are a few charges involved for using this facility. Two of the most important of them are the foreclosure charges that you will pay to your existing lender and the loan processing fee that will be paid to the new lender.So, it’d be wise to consider these additional charges when calculating the savings. Consider using the balance transfer facility only if the savings are significant after deducting such charges.
3. What are the Eligibility Criteria for Using Balance Transfer Facility?
A balance transfer is akin to taking a new personal loan from a different lender. So, you can only use this facility if you meet the eligibility requirements of the new lender regarding your credit score, income, age, etc.Apart from this, there are two other eligibility requirements that are applicable to balance transfers. They are as follows-
- The outstanding balance should be at least Rs 50,000 or above.
- The repayment history of the personal loan you want to transfer should be clean.
4. What are the Documents Required for Balance Transfer?
These are the documents you’ll need to initiate the personal loan balance transfer process-
- Duly filled balance transfer application form
- Identity and address proofs
- PAN card copy
- Bank statements of at least last 6 months
- Recent salary slip of at least 3 months
- 3 years balance sheet in case of self-employed professionals or business-owners
- Loan statement letter from the current lender
Reducing the Interest Burden with Personal Loan Balance Transfer
Balance transfer is one of the most effective ways to reduce the interest burden of your personal loan. But as discussed above, it might not be the right choice in a lot of cases.You can consult with your current lender and the new lender to confirm whether or not the savings would be significant. It doesn’t make sense to get involved in all the documentation and application process if you cannot make decent savings by moving to a different lender.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
