Should you opt for transfer of personal loan balance?
For most people, a personal loan is the answer to their immediate financial crisis. And, getting a personal loan is not a big deal these days, thanks to the proliferation of non banking financial institutions and lending apps. There is less paperwork and the application charges are nominal as well. All you would possibly need is a good credit score. It is even easier if you have already taken a personal loan.
But, did you know that you can even transfer your existing personal loan from one bank to another that offers a lower interest rate. Lenders are offering lower interest rates to those willing to opt for the personal loan balance transfer facility and also apply for a top-up loan.
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And Shivam Shukla, a Noida-based private sector employee, will vouch for this. “I borrowed ₹5 lakh at 13% interest rate from a bank around two years back. Now, I need a second loan of ₹5 lakh for my marriage in about a month. A leading bank has offered to port the existing loan and also a top-up loan of ₹5 lakh,” says Shukla.
While Shukla has still not made up his mind on the new offer, here is what you should know about transferring your personal loan.
How it works: Any borrower can use the personal loan balance transfer option to get a bigger loan, usually from a different lender, and use it to pay off an existing loan. This comes with the advantage of lower interest rates or better loan terms, or both, and can result in lower monthly payments. The process may require you to pay the requisite fees, but the lender will check and verify your creditworthiness.
Sahil Arora, senior director & business head, unsecured loans, Paisabazaar, says, “As in the case of new personal loan applications, lenders usually levy processing fees, documentation charges, etc. for processing personal loan balance transfer applications. Many lenders also offer top-up loan facilities to applicants who opt for personal loan balance transfer.”
Thus, if your existing bank is charging higher interest rates and does not allow you to avail of a top-up loan, you can avail of an additional loan by applying for a personal loan balance transfer facility.
However, the loan amount eligibility for a top-up loan would depend on your income and existing repayment obligation. “Most lenders typically prefer the monthly repayment obligations of their loan applicants, including that of their new loan facilities, to be within 55-60% of their monthly income,” says Arora.
Adhil Shetty, CEO of Bankbazaar.com, says, “One way to increase loan amount through a balance transfer is to transfer multiple high-interest loans into a single loan with a lower interest rate. This can result in a lower monthly payment and potentially allow you to pay off your loans more quickly, freeing up funds for meeting other expenses or goals. Additionally, by combining multiple loans into a single loan, you may be able to negotiate a higher loan amount.”
However, you must also note that some lenders do not allow prepayment/foreclosure of personal loans until you have made the repayment of a predetermined number of equated monthly instalments (EMIs). In such a case, you may be unable to exercise a personal loan balance transfer.
A poor credit history and repayment track record can also hurt your loan eligibility criteria.
Impact on credit score: A new lender will evaluate your creditworthiness for availing personal loan balance transfer facility. Arora says, “Credit report for evaluating loan applications are considered hard enquiries (also called a hard credit check), and each such enquiry reduces your credit score by a few points.”
Shetty adds to this: “A hard credit check can marginally lower your credit score. But this is a minor concern compared to what may happen if there are late payments on the new loan. Timely and full payments of loan EMIs will ensure that any impact on the credit score is reversed in a few months.”
Besides, experts also suggest loan applicants to visit online financial marketplaces to compare the personal loan balance transfer options offered by various lenders. The credit report checks made by online financial marketplaces are considered soft enquiries and do not impact one’s credit score.
Mint take: While applying for a personal loan transfer, you must consider the interest rate on your current loan, the interest rate offered on the balance transfer loan, and any fees associated with the balance transfer.
If the rate and payment terms provided on the new loan are quite similar or equal to the current loan, the balance transfer may not make sense. Also, the balance transfer’s benefits may be limited if you have repaid most of the existing loan. It may be a good idea to consult a financial advisor or do a thorough research t determine if a loan balance transfer is beneficial for you.
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