Summary of this article
Transferring your loan to a lender who offers you a lower rate will help you reduce your borrowing costs. However, this is only beneficial if you save more than any processing fees and other associated charges.
It is important to remember that to get a good balance transfer deal, one has to check with multiple lenders.
Some lenders charge a processing fee for a balance transfer, so it is necessary to take this into account when working out the actual savings.
As the terminology suggests, a balance transfer allows a customer to move their loan balance from one lender to another for better interest rates or repayment terms. It is available for almost every type of loan: personal, auto, home, education loans, and even for credit card outstandings.
The main motive behind a balance transfer is to reduce the burden of a customer's debt.
For example, an individual has a home loan of Rs 1 crore at 8.75 per cent interest for 20 years. The total interest they would pay over the duration of their loan would be Rs 1,12,09,057. After one year, the principal outstanding on their loan is around Rs 98.61 lakh. So here the principal amount has not reduced significantly, because around Rs 8.67 lakh has gone towards payment of interest (out of the Rs 10.6 lakh paid in EMIs during the first year).
“Now they opt for a balance transfer where the interest rate is reduced to 8 per cent for the outstanding Rs 98,60,858 over the remaining 19 years, and they will see an immediate reduction in the total interest they have to pay, which is around Rs 93.5 lakh. So, they save about Rs 10.5 lakh in interest,” informs Anshi Shrivastava, Head - Personal Finance Training at 1 Finance.
If they keep the EMI the same and reduce the tenure instead, they can finish the loan earlier.
Calculation:
Original home loan: Rs 1 crore, 8.75 per cent, 20 years
EMI: Rs 88,371
Total paid = 88,371 × 240 = Rs 2,12,09,057
Total interest = Rs 1,12,09,057
After 1 year:
Principal outstanding ≈ Rs 98,60,858
Balance transfer at 8 per cent for the remaining 19 years (228 months) on Rs 98,60,858:
New EMI ≈ Rs 84,261
Total interest going forward ≈ Rs 93,50,688
Old scenario interest for remaining 19 years (at 8.75 per cent) ≈ 1,03,98,551
Interest saved ≈ Rs 10,47,863
“It is important to remember that to get a good balance transfer deal, one has to check with multiple lenders. They should not finalise the first offer they get,” says Shrivastava.
Some lenders charge a processing fee for a balance transfer, so it is necessary to take this into account when working out the actual savings. Also, they should read the new lender's terms and conditions carefully to ensure they get the best deal.
“Individuals should also check how much they will really save. If they have recently taken a home loan, the interest component will be higher, and in that case, a balance transfer can help them significantly. But if they are closer to finishing their loan, the interest amount will be lower, so a balance transfer won't help them save as much,” says Shrivastava.
In cases of balance transfers, it becomes important to talk to a qualified financial advisor before making the decision. Advisors can help individuals shop around for the best rate, check the terms and conditions, and do the calculations to find out their real savings. Individuals can do this themselves, but if they miss one or two points, it could do more harm than good and defeat the whole purpose.
