A balance transfer moves your existing loan to another lender, usually to get a lower interest rate or better terms. It can save real money on a large loan, but only if the saving is clearly bigger than the cost of switching. Here is how to check.
- The saving comes from a lower rate applied to your remaining loan amount over the remaining tenure.
- Switching has costs, such as processing fees and other charges, so compare the total saving against them.
- The earlier you are in your loan, the more interest there is left to save.
- Always compare the full cost, not only the headline rate.
How a balance transfer works
A new lender pays off the outstanding balance with your current lender, and you then repay the new lender, on new terms. You can also ask for a top-up on the same loan, where the new lender allows it. The property or security stays the same.
The process usually involves a foreclosure letter from your current lender, a fresh sanction from the new lender, and the transfer of your property documents.
A worked example
These numbers are illustrative only and do not describe any lender's actual offer. Say you have Rs. 65 lakh outstanding on a home loan at 9.1% with 15 years (180 months) left. Your EMI is about Rs. 66,315.
If you move to a rate of 7.5% over the same 180 months, the EMI falls to about Rs. 60,256. That is about Rs. 6,059 less every month, and roughly Rs. 10.9 lakh less over the remaining tenure.
From that saving, subtract the one-time costs of the move. If the costs are a small fraction of the saving, the switch is worth considering. If they are close to it, it is not.
Costs to count
- Processing fee charged by the new lender
- Any prepayment or foreclosure charge on the old loan. For floating-rate loans taken by individuals, lenders generally cannot charge a prepayment penalty under RBI rules, but check your own loan agreement.
- Legal, valuation and documentation charges
- Insurance or other add-ons that the new lender may require
When it usually makes sense
- Your rate is clearly higher than what lenders now offer for your profile
- Many years of tenure are left, so there is a lot of interest still to save
- Your credit score and income are better than when you took the loan
- You want a top-up and the new lender can offer it on good terms
When to think twice
- Only a few years remain on the loan, so there is little interest left to save
- The rate gap is small and the switching costs are high
- You have missed EMIs recently, which can affect the new lender's decision
- A cheaper way exists, such as asking your current lender to lower your rate
Get the numbers before you decide
Use our EMI calculator to compare your current EMI with a new one. If the saving looks real, an adviser can check offers from partner banks and NBFCs and tell you what the switch would cost in total. The final decision and terms always rest with the lender.
This article is general information, not financial, legal or tax advice. Figures and examples are illustrative. Finexa Capital (Priyanka Enterprise) is a loan referral partner (DSA). Final approval, interest rate and terms are decided solely by the lending bank or NBFC.