A personal loan is one of the best options for various financial emergencies. Most of the top Indian lenders now provide personal loans to eligible borrowers. However, while a personal loan in India can be a lifesaver on most occasions, it is one of the costly forms of credit options. Usually, there is no tax benefit on personal loan because they are considered a kind of income during income calculation. But note that despite no tax benefit on a personal loan, one might avail of the personal loan tax exemption in case the funds are put towards particular use. One can avail of the tax deduction on interest paid on the personal loan repayments if the loan proceeds are used to mitigate the expense linked with business expansion. As per Section 24 (b) of the IT Act, one is allowed for a tax rebate on the personal loan in case the amount is utilized for home renovation or improvement.
When compared to other credit options, it has the highest rate of interest. One of the effective solutions to lower the interest burden is to opt for a personal loan balance transfer option. Nowadays, there are various top-notch financial institutions that provide this kind of facility on a personal loan.
However, what is a personal loan balance transfer option? Knowing how its functions will make it simpler for you to decide whether to opt for it. After this, have a look at the 4 crucial things about the personal loan balance transfer option:
What is meant by a personal loan balance transfer?
A personal loan balance transfer is a procedure of transferring the outstanding loan balance to another lender. This can assist you to save a crucial amount if the other lender offers the personal loan at a lower rate of personal loan interest as compared to the existing lender.
While the major reason that encourages the borrowers to make the switch to another lender is a lower rate, you also can use the facility if the other lender provides a higher repayment tenure, additional facilities, and better services. However, note that the personal loan balance transfer option may not be the optimal choice for every individual. There are various cases where it will make more sense financially if the borrower sticks with their existing lender.
When should you opt for the personal loan balance transfer option?
When repaying your loan, you would see that the EMI amount that you repay constitutes of principal and interest component. In the initial years/months of repayment of a loan, the interest component is generally higher as compared to the principal amount. So, let us assume you have opted for a personal loan with five years tenure and have already repaid the loan for three years. You would have already repaid a substantial chunk of your interest.
There stands a chance that using the personal loan balance transfer option, in this case, may not prove to be advantageous as expected. The next crucial thing to remember is that there are some charges involved for using this kind of facility. Two main crucial charges are the prepayment charges that you would repay to your existing bank lenders and the personal loan processing charges that you would repay to your new lender.
Thus, it would be advisable to factor in such additional charges when you calculate your savings. Choose the personal loan balance transfer option only if you can save a considerable amount after lowering these charges.
What are the crucial eligibility criteria for utilizing the personal loan balance transfer option?
The personal loan balance transfer option is the same as taking up a new personal loan from another lender. So, you can just use the facility in case you meet the basic eligibility requirements of the new lender, i.e. your income, credit score, age etc. Besides this, there are 2 other eligibility requirements applicable to balance transfer. Listed below are the 2 requirements:
∙ Outstanding balance must be at least Rs 50,000 or more.
∙ The personal loan repayment history that you want to transfer must be clean.
What are crucial documents required for a balance transfer?
Crucial documents are those you would require for initiating the personal loan balance transfer process:
∙ A duly filled up balance transfer application form
∙ PAN card copy
∙ Address and identity proofs
∙ Bank statements of past six months
∙ Current salary slips of at least three months
∙ Three years balance sheet for those who are business owners or self-employed individuals
∙ Loan statement letter from the current lender
Lowering the interest burden with the personal loan balance transfer
A balance transfer is one of the crucial and effective ways to lower the personal loan interest burden. However, as discussed above, it may not be the correct choice in most situations.
One can consult with their current lender as well as a new lender for confirming whether the savings are substantial. It does not make sense to get indulged in all documentation as well as the application process if one cannot make any decent savings by moving to another lender.
Crucial considerations for a personal loan balance transfer
With the assistance of a personal loan balance transfer, one can get another chance to move from their current interest rate to a lower interest rate on their personal loan. However, one must make such a move only after careful consideration. There are various factors that should be considered after before availing of a personal loan. To make sure that you do not miss, ensure to check the listed:
Assess your overall cost-benefit
One thing we all should be completely clear about is that lenders are not generous donors. Thus, no matter how attractive the personal loan balance transfer option is, one should consider all crucial points, assess all the possibilities, and then finally make the decision. The loan officer of the bank would try luring you by lowering your personal loan EMI and enhancing your loan repayment tenure, but you should not fall for it. You may think that these benefits may lower your personal loan liability. However, it may enhance the overall amount that you would have to repay the new bank lender. Owing to the increase in tenure, EMIs will fall, but the interest component increases. In case you are paying higher loan EMIs to your current lender and do not need additional funds, then you must remain with your existing bank lender, enhance the EMI, and end the personal loan at the earliest. In case you want to evaluate your overall outgo of both the personal loan offers from your new and current lender, you can take the help of an online balance transfer calculator.
Consider other charges or fees
The rate of interest is not just the applicable charge that you should consider when availing personal loan balance transfer. For the personal loan balance transfer option, ensure to consider the pre-closure penalty. This charge usually ranges between 1 and 5 % p.a. of the principal outstanding. Processing charges is another fee that your new lender might levy for loan transfer processing. Before deciding your final lender for a personal loan balance transfer, factor in all the expenses as an additional expense. Doing this would assist you in making a better decision.
Read between the lines
This is another crucial consideration to factor in when choosing the personal loan transfer option. You should always read the personal loan balance transfer linked documents carefully. If you are unable to understand the document, you can get in touch with your relationship manager to understand the terms and conditions. Ensure that you don’t miss any hidden fees as it would enhance your repayment amount.
Examine carefully the benefits offered
To entice more customers for this option, financial institutions might provide additional frills like personal accident insurance etc. Do not simply be impressed by these offers. Carefully analyze them along with the terms and conditions. Once you have completely examined them, weigh the pros and cons and opt for it if the benefits weigh more than the cons.