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This article is more than 1 year old.

Here's how loan balance transfer works

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Loan balance transfer is a process by which borrowers can transfer the outstanding principal of their existing loan from one lender to another in order to benefit from the lower interest rate on the outstanding loan.

Here's how loan balance transfer works
Loan balance transfer is a process by which borrowers can transfer the outstanding principal of their existing loan from one lender to another in order to benefit from the lower interest rate on the outstanding loan.
Here are the reasons why should one opt for a loan transfer, according to Gaurav Chopra, founder and chief executive officer, IndiaLends:
Reduced Interest Rates
A balance transfer provides the borrower the benefit of lower interest rates. The new lender will generally offer lower interest rate than the existing loan thus decreasing the total interest liability.
Longer Tenure
While switching to a new lender, a borrower can re-negotiate the loan terms and ask for a longer tenure. Doing this will lower the monthly EMI. However, this may increase the overall interest the borrower pays over the life of the loan and hence needs to be taken into account.
Increased Loan Amount
A loan balance transfer also gives the flexibility to borrow more money. If a borrower’s repayment track record on the existing loan is good, then a new lender will not only provide the borrower with a lower interest rate, but may also offer a higher loan amount as part of the balance transfer process. That said, a borrower should only take an additional loan if it is required.
Once a borrower decides to go for loan transfer, he/she can approach the new lender.
However, the new lender may offer an attractive balance transfer proposition only if the borrower meets the following criteria:
  • The borrower has paid all his EMI's in full and on time on his existing loan.
  • The borrower has a good credit score and has no recent missed payments on his credit cards or other loans.
  • There has been no adverse change to his income or salary since he took the last loan.
  • "It is important for the borrower to evaluate all the available options and take into consideration certain loan pre-payment charges and processing fees that the borrower will have to incur before taking the decision," opines Chopra.
    According to Anuj Kacker, co-founder, MoneyTap, it is recommended to go for loan balance transfer only if it substantially cuts down the overall cost of the loan and helps borrower in saving money in the long run.
    "Carefully evaluate the balance transfer offers before choosing the one, as some charges may be involved like foreclosure charges levied by the current lender, processing fees, documentation charges etc. Get a quote from the current lender highlighting details such as principal amount left, tenure completed, rate of interest," he opines.
    For example, in case of the home loan balance transfer, several banks ask for a clear payment track record of 18 months as an eligibility criterion, while some also do it with comparatively lesser documentation. Similarly, for other loans such as auto, personal, or education, banks usually ask for 12 months of repayment history.
    Every bank follows a different method of evaluating credit history, which basically includes skimming through the credit score and other bank details, as per Kacker.
    Disclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions
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