A personal loan balance transfer, i.e., you transfer your outstanding personal loan amount to a new lender at a lower interest rate. If you are paying higher interest on your existing personal loan, switching to another lender offering a lower personal loan rate seems like the preferred option.
While the balance transfer facility can help you reduce your overall interest cost and ease your EMI burden, the actual benefits depend on multiple factors like net savings after considering the cost involved in the loan transfer, the tenure you opt for on post balance transfer, etc. Ask yourself the following questions to ensure the balance transfer of your personal loan truly makes financial sense.
Q1. Is There Interest Cost Savings After All Costs?
The primary reason for a personal loan balance transfer is to reduce the EMI burden and the interest costs of the loan. But the balance transfer facility itself comes with charges from both the existing and new lenders.
Stated below are the general charges levied by lenders:
- Processing fees (charged by the new lender)
- Administrative or documentation charges (charged by the new lender)
- Foreclosure charges (levied by your current lender)
- Transfer charges (levied by your current lender)
While a balance transfer can lead to savings through lower personal loan interest rates, it’s important to factor in the above associated costs to determine if your net savings outweigh the cost involved in doing so.
Q2. Is This the Right Time in Your Loan Tenure to Switch?
You pay most of the interest component at the beginning of the loan tenure, therefore, leaving less scope for savings on interest cost through a loan transfer in the later stages. You should keep the tenure of your new personal loan the same as your existing personal loan, unless the primary objective is to reduce the EMI burden. The longer loan tenure would result in higher interest cost, even though you transferred the loan at a lower interest rate.
Additionally, if you’re nearing the end of your loan repayment tenure, there’s very little scope for interest cost savings—even if the new lender offers you a lower personal loan rate. In such cases, the cost of loan transfer (processing fees, documentation fees, foreclosure charges, etc.) may outweigh the benefits.
Know: How Personal Loan Tenure Impacts Your EMI and Total Interest Cost
Q3. Have You Tried Negotiating With Your Current Lender First?
As a balance transfer is considered a new loan application, you have to undergo the loan application process, including submitting documents. The process can be tedious and time-consuming. Therefore, before applying for a personal loan balance transfer, you should first negotiate with your current lender regarding the interest rate, tenure, etc. Ask your existing personal loan lender to match or beat the lower interest rate offered elsewhere. If your current lender agrees to do so, you can:
- Save time on paperwork
- Avoid additional charges related to transferring your loan
- Avoid charges related to a new personal loan application
