How to Use Balance Transfer to Trim Loan EMI

If you have taken out a loan, chances are that a huge part of your salary is eaten up by the EMI monster each month before you can even put it in your pocket. Other than having less spending money, this also means that you are left with little to none when it comes to savings. It a vicious cycle and you’re not alone in it. Unlike what many people think, it is not something that you just have to accept as part of life either. You can use balance transfer to unlatch yourself from this cycle by paying smaller EMIs and thus saving more money.

If you have never heard of balance transfer, here is a simple explanation: It is a process of paying off one loan by getting another loan at a cheaper rate. By doing so, you can save money on instalments. This method is particularly useful if you are one of the many out there who struggle each month to make ends meet after paying huge EMIs that their high interest rate loans squeeze out of them.

Let’s take Sita as an example. Sita got a personal loan a year back and has since been paying a monthly EMI of Rs. 18000. This year she found out about a finance company that offered personal finance for a much cheaper interest rate. After talking to a representative from the bank, she figured out that she could save as much as Rs. 2000 per month if she consolidates her existing personal loan by taking personal finance from the second bank at a cheaper rate of interest. After learning more about it and going for the balance transfer afterall, she realized that she saved Rs.24,000 per year on his yearly instalment amount.

Balance transfer may be even more useful in case of home loans because the loan tenure is way higher than a personal loan. Therefore, even if there is a slight change in the interest rate, it could mean greater benefits for you.

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What are the main advantages of availing balance transfer?

Following is a list of advantages of availing balance transfer facility for different kinds of loans or credit cards:

  • At any point of your loan cycle, you can take advantage of prevailing low rates if you apply for balance transfer.
  • Balance Transfer reduces your monthly EMI by lowering your interest rate.
  • You can get astounding interest rate since banks love to offer balance transfer loans on original loans of rival banks.
  • When the prevailing rates are low, go for balance transfer and make the most of market conditions.
  • You might be able to negotiate the terms and conditions with the lender before choosing to transfer your loan balance and mutually arrive at a conclusion that is agreeable to both of you.
  • You will not only be able to get a low interest rate but can also opt for a lender that offers better services to its customers compared to your current lender.
  • Lenders will consider the current market value of your asset and not the old one. Therefore, you might become eligible for a top-up loan.

Reasons to opt for a balance transfer

  • Individuals can choose to transfer their outstanding debt when there is an apparent difference in the rates.
  • When the borrower wants to reduce the burden of the loan EMI, he or she can opt to transfer his/her loan balance.
  • When an individual requires a top-up loan to meet his or her immediate credit needs, the balance transfer is one of the most sought-after solutions.

How to transfer your loan balance?

  • Check the ongoing rate of interest on a half-yearly or quarterly basis, or at the time when the Government or Reserve Bank of India (RBI) usually makes major announcements in terms of the rate.
  • Study the dynamics of the chosen loan scheme.
  • Compare the rates, terms and conditions, and features of the product that the lenders are offering.
  • Explore your options to rationalize the interest rate that you have selected.
  • Submit the required documents to a competing lender to learn about your eligibility.
  • Apply for a balance transfer along with all the required documents to the selected lender.
  • The lending organisation usually takes approximately 2-3 weeks to send a confirmation regarding the proposal acceptable to the applicant.
  • Next, you will have to inform your existing lender and get a letter mentioning the outstanding loan amount.
  • The new lender will then pay the existing lender in order to obtain the necessary loan documents. This process can take up to 2 weeks. Thereafter, the borrower will have to pay the EMI according to the new scheme.
  • After 10-15 days, the loan is closed by the original lender and the concerned documents are transferred to the new lender.

What to watch out for:

If balance transfer sounds too good to be true, you may be right as there are many pitfalls that you could fall into if you are not careful. Here is a list of what you should keep an eye out for when you are considering a balance transfer:

  • Ask your existing loan provider itself if they are willing to match the rate that their rival bank is offering.
  • Do the math and make sure that the new offer will reduce your loan installment without increasing the loan tenure.
  • Make sure that you read the fine print. Is there any processing fee that the other bank is charging for giving you a new loan? How high is it? Is it worth the change in providers? Are there other providers who will offer the balance transfer at a similar rate but with lesser processing fee?
  • Ensure that the rate of interest currently being offered by the new lender is not a teaser loan rate. Such kind of interest rates is introduced for a short span of time by lenders in order to attract new customers. If this is not checked in advanced, you might end up in the same spot as earlier.
  • Do not transfer the balance of your loan at the end of your loan repayment tenure as the difference will be marginal at that time. You should opt for this facility only when you are able to save a substantial amount of money.
  • Calculate the total amount to be paid in the end under both the scenarios to ensure that you do not end up paying more than before.
  • You should not provide the complete original collateral if you have already repaid some of the loans. Try to offer a lesser amount of collateral in such a case. However, if the lender insists on providing the original collateral, try to negotiate with the lender to reduce the interest rate further.
  • Learn about the new terms and conditions before transferring the balance of your loan in order to avoid any future surprises.

News About How to Use Balance Transfer to Trim Loan EMI

  • MCLR rates of IDBI Bank has been increased by 5-10 bps

    IDBI Bank has increased its marginal cost of funds based lending rate (MCLR) on Monday 14 May 2018 by 5-10 basis points (BP) across the various loan tenures. While the MCLR rate for the overnight, one month, 3-month, and 6-month tenor has been raised to 8%, 8.10%, 8.35%, and 8.45% respectively, the MCLR for 1-year tenure is revised and fixed at 8.65%. The new MCLR rates have been applied on the respective tenors with effect from 12 May 2018. As a matter of fact, in the recent past, the lending rates including the MCLR rates of several banks have undergone a marginal hike.

    23 May 2018

  • Bulk deposit rates will likely remain volatile this month

    As banks look for additional resources in an effort to meet FY2018-19 targets, the bulk deposit rates are expected to remain volatile this month. HDFC Bank cut its deposit rates by 100 bps whereas Punjab National Bank and State Bank of India have hiked their bulk deposit rates over the last 3 months. HDFC Bank bulk deposits over 61 to 90 days will earn an annual interest rate of 6% while 6-month bulk deposits will earn 6.5%. The tight liquidity condition in the market was reflected by the top banks increasing their retail and bulk deposit rates in the past few months. SBI had hiked its bulk deposit rates by 25-75 bps across maturities on 28 February 2018. The Reserve Bank of India (RBI) has announced that 4 auctions will be conducted this month to purchase securities and infuse Rs.1 trillion into the system so that the liquidity condition can improve. The hike in bulk deposit rates has signalled a hike in lending rates as well by major banks such as SBI, ICICI Bank, PNB, HDFC Bank, IndusInd Bank and Axis Bank.

    14 March 2018

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