Balance transfer or personal loan?

The most common forms of debt prevailing in India are credit card debt and mortgage debt. Personal loans are another form of debt, posting steady growth and penetration over time. The good thing is, whatever the type of loan you opt for – be it education loan, auto loan, or home loan, financial institutions provide you the facility of transferring the outstanding loan balance to a new loan account with new and better loan terms. The same applies to credit cards as well – the balance on them can be transferred.

Balance transfer

If you have unmanageable outstanding balances on an existing loan or credit card, you can pay it off using a balance transfer. A percentage of the outstanding balance will be charged as a fee by the lending institution. However, many banks charge very less, or sometimes no charges at all. Balance transfer works well when applied in the initial phase of your loan repayment.

In a balance transfer, if you move the outstanding balance of a particular loan from one bank to another, you will be given a new set of features that include a much lower interest rate and a top-up amount (if required). Credit card companies and banks offer balance transfers with a zero rate of interest for periods of up to 6 months in order to help customers pay off their outstanding amounts.

For example, if you have a personal loan of Rs 3,00,000, at 20% per annum for 3 years, the EMI comes to Rs 11,149. The total interest payable for the loan duration will be Rs 1,01,367. The total payment including the principal and interest will be Rs 4,01,367.

At the end of one year, if you go for a balance transfer with a new interest rate of 14% per annum, the outstanding principal will be approximately Rs 2,00,000. The EMI at 14% for 2 years will be Rs 9,603 and total interest payable will drop down to Rs 30,462. The total payment including the principal and interest will be Rs 2,30,462.

Clearly, after the balance transfer, your monthly EMIs will reduce and the amount you pay as interest will also drop significantly.

As far as credit cards are concerned, banks allow you to transfer the outstanding balance from one card or multiple cards to a single credit card, while also not charging you an interest on the transferred outstanding balance for a set time-period (up to 6 months in most cases). This works out well for you, considering credit card interest rates are a whopping 35% - 40% p.a, or more.

Why people go for balance transfer to clear their debts?

Though there are very few who know about this impressive facility offered by lending institutions, balance transfers are highly opted for to get better features. These include:

Better interest rates

It may be possible that while taking a loan, you were earning a good income, and so you could easily pay a higher interest on your loan or credit card. However, in future if you come across a situation where you face instability of income or employment, you can alter the loan terms through a balance transfer.

A personal loan balance transfer can be used to transfer your outstanding balance to a new one. Financial institutions offer lower interest rates on balance transfers. This way, the amount of the new loan will be utilised in paying the outstanding balance rather than the increasing interest on the previous loan.

Low EMIs

In case you have taken out a loan, there are chances that a large part of your income is going into payment of huge EMIs. More than that, you will have to restrict your spending habits, which bring down your savings from little to nothing. Since a personal loan for balance transfer offers a reduced interest rate, it will eventually bring down your EMI amount.

Longer tenure

With reduced interest rate, a balance transfer also offers extension of loan tenure. This helps reduce the financial pressure that was adding to your woes in the previous loan. It would be easier to manage your monthly repayments.

Top-up amount

There are some lenders that offer an additional loan amount in case your existing loan amount is insufficient to serve your financial needs. For instance, let’s say, you’ve taken a personal loan for renovating your home. After the renovation, you find it is only the balcony area that needs a final touch but you’re left with no extra funds. A balance transfer option will offer a top up amount to fulfill such quick funds when required. This is subject to approval by the bank/financial institution that is accepting your request for a loan transfer.

Better loan services

Banks offering balance transfers are always willing to serve you better. In case you are not satisfied with your current lender, transferring your outstanding balance to a new lender will definitely provide you improved services.

(The writer is Founder & CEO at
Qbera.com)