Balance transfer of a loan happens when the entire unpaid principal loan amount is transferred to another bank for a lower rate of interest. This allows you to make effective, tactical use of existing interest rates that are being offered by different banks across the country. If you have paid your dues on time without defaulting, then this process is usually quite simple.
For example, if Bank A is offering a lower interest rate than your current bank for Balance Transfer, then you can transfer the remaining principle amount to Bank A and pay off the rest of the interest on the lower rate that Bank A is offering.
However, Balance Transfers might not always be lucrative. A cost-benefit analysis has to be done before you make your decision. There are three factors that have to be accounted for:
- Amount of loan unpaid
- Interest rate offered
- Remaining tenure
If the unpaid amount is too low, or if the remaining tenure is too short, then balance transfer may not be the best course of action. Especially because banks charge a processing fee for making the said transfer.
Although Balance Transfer is applicable to all kinds of loans, including Auto Loan, personal loan, and education loan, the most popular is Home Loan Balance Transfer due to the higher principle amounts that that the loan is being issued for and the longer tenure involved. Therefore, even a slight interest rate cut will impact the final interest payable in a big way in the long run. The reasons for Balance Transfer is also not limited to just better home loan interest rates. People do it for better services, or for a top-up on the existing loan that the current lender may not be willing to provide. Also, a better credit rating for an individual could also be a reason for making a balance transfer.
The cost of Home Loan Balance Transfer may also vary. If you have a home loan with a fixed housing loan interest rate, or a personal loan, your existing bank may charge a pre-payment penalty for transferring your loan. Or if you are making the transfer soon after you’ve taken the loan, your existing banker may charge a higher fee. The higher cost though is the processing fee that is being charged by the new lender. It can be in the range of 0.25-1% of the outstanding loan amount, or it can be a flat fee. Some banks even charge an administrative fee. Such factors must be taken into account while opting for a balance transfer.
The benefits of making a Balance Transfer is multi-fold, but highly dependent on various other factors. Make sure you take an informed decision when you do choose to do so.
To transfer your home loan with us, contact us here!