Balance transfer your personal loan only if interest gap is 0.5-1% or more

The pre-closure penalty usually ranges from 1 to 5 per cent of the principal outstanding amount

Personal loans are useful in times of unexpected financial needs. Take Vandana Uke (name changed), for instance, a Mumbai-based private sector employee, who took a personal loan during the Covid-19 pandemic in mid 2020. Uke says, "I borrowed Rs 4 lakh at 10.95 per cent interest from a bank in which I have a salary account, but I hear now some banks are offering a much lower rate." Several banks are offering Diwali festive rates that are lower, along with processing fee waivers, even now. For instance, Union Bank of India charges starting 8.9 per cent, while Indian Bank is offering at 9.05 per cent, to name a few (See table).

Deepali Sen, founder partner, Srujan Financials Advisers, says, "With the third wave of the virus a possibility, it is advisable to reduce liabilities as much as possible." One way for Uke to do so is balance transfer of her existing personal loan to one with a lower interest rate. Adhil Shetty, chief executive officer (CEO), BankBazaar.com, says, "A loan transfer is a way of consolidating your debts for better financial management. Here you shift your existing loan to a new lender to avail lower interest rates, a higher loan amount, or both."

Pros: Balance transfer comes with several advantages. Gaurav Chopra, founder & CEO of IndiaLends, says, "This lowers the borrower’s interest burden on the outstanding personal loan."

Many lenders offer top-up facilities on your existing loan along with personal loan transfer. Chopra adds, "Here, the loan balance is directly paid to the previous lender and the fresh amount of the loan will be credited to the borrower’s account at the best rate of interest."  

Also, if you have been a good borrower, you could get additional benefits. Depending on your past payment record and changing income dynamics, you could get balance transfer offers from other lenders, that give you better loan features such as a waiver of last EMI and zero processing fees.

Cons: You are liable to pay a processing fee and other charges. Sen adds, "Work out the numbers to see whether or not there will be considerable savings and be mindful of any prepayment penalty." This varies depending on the amount that is due to be repaid. It lies between 0.5 and 3 per cent. V Swaminathan, CEO, Andrameda and Apnapaisa says, "Your repayment date is subject to change once the balance transfer is complete. This could hamper your repayment plans." The lender may offer extra frills, such as personal accident insurance. Don’t be easily impressed by such offers. They come with too many conditions.

Swaminathan says, "This could lower your credit score if you are increasing your debt."

Things to know: Consider a few things before going ahead. Shetty says, "Unless there is a significant difference of more than 0.5-1 per cent in the interest you are paying, a refinancing may be premature as costs would eat into any savings you may make by refinancing the loan."

So negotiate with your lender for better rates before opting for refinancing. Never forget to evaluate the total cost-benefit. The lender may try to lure you by decreasing your loan EMIs and increasing your loan tenure, but you must not easily fall for it.  When the loan tenures increase, EMIs will decrease but result in higher interest pay-outs. Chopra says, "If you’re paying higher EMIs with your current lender and do not require extra money, then you should stay with your existing lender, increase the EMI to finish off the loan as soon as possible."  

If you want to assess the total outgo of both loan offers from both current and new lenders, you can use an online balance transfer calculator.

Sahil Arora, Senior Director, Paisabazaar.com  says, "Those wishing to switch their loans from fixed interest rate to floating interest rate can exercise personal loan balance transfer if their existing lender does not provide this option or is charging a sizable fee for it."

Alternatives: Existing home loan borrowers who have also availed a personal loan may consider top-up home loan as an alternative to personal loan balance transfer. Arora says, "As the interest rate of top-up home loans are usually the same or a notch higher than the underlying home loan, opting for a top-up home loan is usually a more cost-effective solution than personal loan transfer."