Several reputed banks and financial institutions are open to refinancing personal loans at competitive interest rates. Personal loan balance transfer deals are indeed a boon if you are stuck with a personal loan that attracts high-interest rates and is looking for some flexibility in terms of repayment or additional funding.
Transferring your outstanding personal loan to a different lender does have its benefits, but there are a few drawbacks that need to be carefully evaluated. You must be already aware that a personal loan balance transfer will enable you to:
- comfortably repay the loan by opting for a full 5-year term to settle outstanding debt
- address other expenses as the lower interest rate will bring down the equated monthly installments more your debt more affordable
- request for an additional loan over and above the remaining portion of the transferred loan
- enjoy better service quality if at all you had any service issues with the previous lender
While the above-mentioned benefits can clearly make a difference when you need additional time to settle the debt or money to fund any ongoing /delayed ventures, it is important that you steer clear of common pitfalls that are typical when considering loan balance transfers.
Do not underestimate the costs involved in getting your personal loan balance transferred to another lender. While a 1% or 2% foreclosure charges may look simple on paper, it could work out to a hefty fee when applied on the outstanding debt.
Add the processing fee and other charges that you may incur during the process and you may find yourself reconsidering your decision to switch lenders. The key is to opt for personal loan refinancing, not because it is available at lower rates, but only because you really the debt to be more affordable. The financial benefits must outweigh costs, at least over time, even if not initially.
Almost all lenders servicing personal loan balance transfer are bound to offer competitive interest rates. As repeatedly highlighted, a negligible interest rate difference of 1% or even lesser is definitely not worth the effort of even exploring the option further.
As you may have already known, the rate as well the type of interest levied on the loan, determine the amount you need to pay as EMI. Fixed interest rate during the loan tenure can work out costly, while the variable interest rate that is based on the outstanding loan amount tends to be favorable. However variable interest rates are subject to changes.
Do not opt for a personal loan balance transfer based solely on the lower the interest rate. Ascertain if the rate and type will make any significant difference in long-term affordability.
Remember to check on the validity period of interest rates, especially if they are too good to be true. It is common for interest rates promised in promotional balance transfer offers to be valid only for a limited period of the loan term, after which you may be charged a different rate.
Timing the Switch
It is possible for you to maximize the benefits of lower interest rates when you opt for a personal loan balance transfer during the earlier months of the loan term, preferably before the half-way mark. Interest payable on the entire loan is relatively more at the start of the term and interest rate benefits may not be significant if you choose to transfer the outstanding debt after you have paid-up a considerable portion of the loan.
Costs of the balance transfer may not be justified at later stages of the loan. Also, the outstanding debt must meet the minimum loan amount criterion specified by the lender for you to even qualify for the loan.
If you have already paid up nearly 50% or more of your personal loan, stick with the lender and settle the loan fully and take a new loan if necessary.
Similar to personal loan and other loan offers, it is important for you to read through the personal loan balance transfer offers carefully and fully understand the outlined terms and conditions in order to make an informed decision. Do not assume any concessions or discounted fees unless it is clearly specified in the terms.
When in doubt, do not hesitate to ask for clarifications or more information as you may not be able to foreclose the balance transfer loan in most cases.
Balance transfer loans demand better fiscal discipline as you have no other option but to fully settle the debt in a systematic manner.
As noted earlier you will no longer have an opportunity to foreclose the loan or switch lenders. You have to pay up the EMIs in a systematic manner without any delays or defaults as these instances will not only attract penalty but will also affect your credit scores.
If you have opted for a personal loan balance transfer to consolidate other loans, especially credit card dues, remember to cancel add-ons to the credit card taken in the name of your family members. You may cancel the main credit card itself so that you don’t accumulate any further debt.
With just a part of the original loan to pay up at relatively lower interest rates, you are bound to have some disposable amount on hand. If possible maximize returns on this income so that you can manage your expenses without applying for additional loans unless absolutely necessary.
A personal loan balance transfer is a convenient alternative to make personal loans more affordable if the associated costs are manageable. It is however important to carefully evaluate the offer and the need to get the loan refinanced before opting for the deal.