The COVID-19 pandemic has disrupted the lives of many. It has majorly impacted the cash flows from businesses due to frequent lockdowns all over the country. The situation reduced the consistent earning of any business person. Salaried persons have had to suffer reduced pay. These problems magnify when you have a fixed outflow in the form of EMIs, especially the loan EMIs wherein the interest rates are usually high. The solution to this problem is the balance transfer of your loan! Yes, it is allowed in India.
Balance transfer refers to a facility where you can shift the outstanding principal amount from one lender to another with a reduced interest rate and other attractive features.
What are the benefits of a personal loan balance transfer?
- The income of any financial institution is the interest income from loans provided. Hence, the new lender would be interested in acquiring the loans of other bankers. So, the basic benefit you would receive is a reduced interest rate. Even a 0.5% flat reduction in the personal loan interest rate will create a significant difference in the EMI amount.
- The new lender is likely to provide an extended tenure. This helps you to flexibly choose your repayment schedule as per your paying capacity. This will further allow you to streamline your budget for other priorities such as education.
- Since the new lender wants to acquire your existing loan, it would offer you lower processing fees.
- You can also apply for top-up along with a balance transfer. This would also be covered in the same reduced interest rate. An Increased amount of the funds at your disposal will help to satisfy your financial needs.
How does balance transfer affect your loan repayment schedule?
Let us take an example to better illustrate the impact of a balance transfer. This helps you reduce the amount of interest you would need to pay to the lender.
|Sr. No.||Particular||New Loan||Existing Loan|
|A||Outstanding balance||₹ 15,00,000||₹ 15,00,000|
|B||Interest Rate (per annum)||11.50%||14.50%|
|C||Number of Months remaining for maturity||60||60|
|E||Difference in EMI amount||₹2,304|
|F||Total EMI Payment over the tenure (C*D)||₹ 19,79,335||₹ 21,17,545|
|G||Total Interest paid (F-A)||₹ 4,79,335||₹ 6,17,545|
|H||Savings in interest expense*||₹ 1,38,211|
|I||Percentage of savings to principal outstanding (A/H)||9.21%|
As per the calculations shown above, you can observe your savings are at 9.21% against the principal outstanding amount.
*Actual savings amount would be a little lower since processing charges are applicable on balance transfer which varies as per each financial institution.
What is the process for a personal loan balance transfer?
- Identify the financial institution offering a lower rate of interest on such loans. You can easily look this up using a personal loan EMI calculator. Estimate the amount of savings in the interest expense.
- Since you will be paying your banker in advance, the present banker will charge for prepayment or foreclosure charges. Foreclosure charges occur since the present lender has unexpectedly lost the future interest income. The current lender will also charge some processing fees for the closure of the loan. These charges together are known as the cost of the transfer.
- The new lender will charge the transfer fees.
- Now calculate the net amount of savings by reducing the transfer cost and charges for a balance transfer.
- Next, you need to obtain the No Objection Certificate (NOC) from the existing lender. This certificate is required to be submitted to the new lender.
- Now apply to a new banker for a personal loan online. The new banker would perform preliminary checks and process your application.
- Sign the documents asked by the new lender and obtain your disbursal amount.
Reduction in the monthly cash outflow is a huge relief in today’s volatile environment. Since the entire economy was disrupted during the lockdown period, many have faced financial difficulties. A balance transfer is a great measure to make your life a little hassle-free.