Financial emergencies may force you to avail personal loans at higher interest rates. However, once the emergency subsides, you can consider transferring your outstanding personal loan amount to a new lender offering lower interest rates and/or at better loan terms. Securing a personal loan at a lower rate of interest will not only reduce your EMIs (considering the residual tenure remains the same) but also the overall interest outgo. While transferring your personal loan, you can also:
- extend loan tenure,
- avail top up loan facility, and
- consolidate multiple loans into a single loan
How does personal loan balance transfer work?
Personal loan balance transfer starts with you applying for a new loan with a lender (same lender or a different one) offering interest rate lower than the rate at which you’re servicing personal loan. Once your loan request is approved, the new lender pays off your ongoing personal loan with your old lender and in turn sanctions a new personal loan. Now you have to make EMI payments to the new lender based on the new interest rate, loan tenure and other terms as stated in the loan agreement.
Your new lender may levy processing fee, documentation charges, etc. like it does in case of processing a fresh personal loan application. As your existing lender would have to foreclose your personal loan account before the completion of the loan tenure, it may also charge prepayment/foreclosure charges. Note that RBI has barred lenders from levying prepayment/foreclosure charges fees on personal loans availed at floating interest rates. However, no such restriction applies on personal loans availed at fixed interest rates. Therefore, when evaluating your savings through balance transfer, remember to include these costs to determine if making the balance transfer is beneficial or not. Many lenders also restrict personal loan borrowers from prepaying/foreclosing their personal loans until the repayment of a predetermined number of EMIs.