The idea behind personal loan balance transfer to a credit card involves transferring the unpaid principal loan amount from one bank to another to get an either a decreased rate of interest or an increase in loan repayment tenure or maybe both. Thus the burden of debt on the borrower can be reduced considerably through this process. A balance transfer is not advisable when only a few years remain in the repayment schedule, and more than half the loan amount has been settled already. Some other reasons for a loan transfer may be when the borrower fails to negotiate on specific terms leading to dissatisfaction with the service offered by the current lender. The new lender may also offer attractive top-up loan facility that allows one to borrow more money.
In the current scenario, almost all banks are allowing a smooth process of transfer of loans with nominal charges; subjected to the borrower’s healthy EMI repayment track record. Some of the cost that the balance transfer attracts is the foreclosure charges that are exacted by the current lender, processing fees that may be charged by the new lender and stamp duty on the loan agreement. Let’s have a clear, in-depth understanding of the below-mentioned aspects before opting for personal loan balance transfer:
Even though the new bank may offer a reduced monthly EMI, one needs to be aware that such an offer will have an impact on his total outflows since the ROI will keep on adding. One must compare the current EMI with the new one. It is advisable not to go for a loan transfer if the finances are in a manageable position. Also, it is a wise decision not to go for marginally better interest rates.
Processing fees and technical charges
One should also take into account the processing fees, valuation charges, legal fees, technical charges, etc., and compare it with the EMI reduction offered by the new bank. Some banks calculate processing fees as a percentage of the outstanding loan amount, while for others it is dependent on the borrower’s income dynamics.
Security for the outstanding balance
If a significant portion of the outstanding amount has already been paid, then we suggest that one should not declare the original security for the transferred loan. Instead, extend a guarantee with a lesser value than the original. In case the new bank insists on keeping the original one, then negotiate on the interest rates.
Terms and conditions
To ensure a hassle-free loan transfer, one must make sure to carefully read the terms and conditions and hidden charges put down by both the banks before signing on the dotted line. All essential documents pertaining to the current lender must be carefully attached to the application before submitting them to the new loan provider.
Some rarely thought of aspects:
Banks generally insist on opening a savings account while applying for loans through which further transactions can be made. It is best to apply for a loan through a bank with which the borrower has been maintaining his account since being a premium member of the bank; he will be well-versed with all their processes and will have quicker access to services. These days, banks offer attractive benefits on loan transfer like free credit card and accident insurance. It is however always better to assess the need for such offers, and we suggest reading the fine prints associated with them carefully before going ahead.
A gist on how to transfer personal loan balance to a credit card:
Begin by applying to the current lender requesting for loan transfer to the preferred bank. Based on the request, a NOC and bank statement will be issued mentioning the outstanding loan amount with a letter of consent. Submit these documents to the new bank for subsequent examination and approval. The bank will sanction an amount for closure with the current lender. On completion of all the transfer formalities, the documents will be handed over to the new lender, and all post-dated cheques and ECS with the previous bank will be scrapped. However, the bank to which the loan will be moved will consider it as a fresh loan and all the associated procedures like legal verification, technical evaluation, credit appraisals, etc. will have to be followed once again. Sometimes a processing fee which falls in the range of 0.5% and 1% of the outstanding loan amount may also be levied.
With the reduced ROI of the credit card when compared with the erstwhile ROI of the personal loan, borrowers can repay their loan rather sooner in the long run. However, the loan balance transfer can be carried out only after the assessment of credit risk has been made and the prospective borrower clears the creditworthiness criteria.