Personal loan disbursals have surged in India, thanks to the demand and availability of easy credit. A report suggests that around 67% of the total personal loans disbursed between April and December 2020 were to applicants with an income of less than Rs.3 lakh per year.
Financial institutions have also witnessed a distinct growth in applications from relatively young individuals.
- Between April and December 2020, 51% of personal loan borrowers belonged to the age group of below 35-years.
Borrowers in this age segment often lack solid financial backing, unlike that of older individuals. Thus, they often look for the best terms and interest rate offerings. In some cases, such borrowers may need to opt for a personal loan balance transfer as well.
Understanding the basics of balance transfer
A balance transfer also referred to as loan refinancing, is an option that borrowers can utilise to avail better rates against their credits. Essentially, during such a transfer, a borrower shifts his/her principal outstanding from one financial institution to another. One undertakes such a move to avail lower interest rates and other benefits.
Keep in mind that a borrower would still need to submit important documents required while applying for a personal loan during refinancing, along with fulfilling any additional eligibility criteria set by his/her new lender.
Furthermore, a borrower should know that such a transfer is most beneficial during the initial period of repayment. At such times, the interest component in EMIs tends to be higher than the principal repayment component, thereby enabling borrowers to save the maximum amount.
For example, an individual avails a personal loan of Rs.5 lakh for 60 months at 15% interest. He decides to refinance this loan on the 24th month of repayment. Another borrower avails refinancing with the same principal terms and tenure. However, he opts for a loan balance transfer on his 48th month of repayment. In both cases, the new interest rate is 12%.
In the first instance, the individual would end up saving around Rs.18,873 as interest payment on his loan. However, the other borrower would only save around Rs.2,600. Thus, the timing of one’s personal loan balance transfer is crucial. Additionally, borrowers should also know about the fees and charges applicable on a personal loan transfer.
Benefits of a personal loan balance transfer
Refinancing a personal loan can have major benefits. Here are some of these –
- Reduce EMIs significantly, allowing for easier management and repayment of dues.
- Decrease the overall interest cost of a personal loan, thereby limiting a borrower’s total liabilities.
- Borrowers also acquire access to additional finance in the form of top-up loans. Such loans are offered by the financial institution when the existing loan is shifted.
- Minimal documentation is involved with a balance transfer, while some reputed lenders may also extend pre-approved offers.
Pre-approved offers from lenders, such as Bajaj Finserv, ensure speedy and convenient loan approvals. Individuals can check their pre-approved offer by providing a few essential details when they seek financial products like personal loans, credit cards and business loans.
- The personal loan outstanding at the end of July 2020 was around Rs.7.22 trillion.
- This marked a 13.3% growth from July 2019.
Availing a top-up loan is one of the prime reasons individuals often opt for a balance transfer, apart from saving on interest payments. These loans do not count as a separate credit and involve minimal paperwork.
Should you opt for a balance transfer?
Personal loan balance transfer offers several advantages. However, before opting for one, one must consider the following factors –
- Interest rate difference – To ensure sizable savings from this personal loan balance transfer, a borrower should look for an interest rate difference of 0.5% or more.
- Number of EMIs remaining – Individuals whose personal loan tenure is nearing its end should avoid refinancing, as doing so can lead the borrower to incur an increased cost instead of savings.
Understanding how to manage personal loan EMI repayment efficiently involves learning all about balance transfer. Borrowers possessing the required expertise can gauge the correct circumstances for a refinance.