For 25 year old Natasha Sharma, life in a big city in Mumbai spelt freedom from the small town she grew up in. She thus wanted to live it up in the big city. With a decent job in a MNC she couldn’t have asked for more! But what she earned did not seem to suffice for the high life she wanted to lead. Thus, when an attractive personal loan offer came by, she took it up to buy the one designer dress and a piece of jewellery that she was lusting after. Then there were parties and derby invitations that landed on her lap and the shopping continued.
But the party could not last forever. Soon, she had maxed out her credit cards and she found herself in a position where she couldn’t handle the debt pile she had accumulated and could do with a lower Emi outgo. A friend of hers then suggested that she opt for a balance transfer of her personal loan. But does hopping from one lender to another really help? Let’s take a closer look at the pros and cons of a personal loan to find out:
How a balance transfer can help:
Lower rate of interest
The first reason to consider a balance transfer is to reduce your interest rate burden. For instance, in Natasha’s case who had taken a loan at an interest rate of 15% two years ago. Her EMI amount is ₹11,895 and she has made regular repayments for the past two years. The remaining amount on her personal loan is ₹3,36,000 and Natasha made a balance transfer for this amount for a period of five years. The new rate of interest she was offered was 12.99% and new personal loan EMI worked out to be ₹7,643 which has freed up her cash flow to be redirected towards the repayment of her credit card outstanding and other monthly expenses.
Reduces loan tenure
Though Natasha did not lower her loan tenure as she made a balance transfer, because she had cash flow constraints, you can choose to lower the tenure of your personal loan as you make a balance transfer. By lowering your loan tenure, you can be debt free in a shorter period of time.
If you are feeling bogged down because you have to keep track of multiple lines of credit, you can consider a balance transfer that will roll up and make a onetime repayment of your other outstanding debt. By doing so, you will not only have a better grip on your debt repayment schedule, you will have also improved your credit score in the process.
Not all is rosy about a balance transfer
High processing fee
Although you may be calling it a balance transfer of your personal loan, for a lender you are transferring the loan to, it will be considered a fresh line of credit. Therefore, you will be charged a processing fee on your outstanding amount which may be anything between 1.5-2% of the outstanding amount. Taking the processing fee into consideration along with new rate of interest the difference in your EMI may not be a big one.
You may be locked in for a longer while
Natasha, as mentioned earlier, made a balance transfer for five years. This meant that in effect she will be in debt for seven years (as she had made repayments for the last two years to her previous lender) instead of five as she had originally planned. Therefore, unless you are desperate to free up cash in the short run, a balance transfer may not be the best idea.
In conclusion, here are the things you must do before you consider a balance transfer of your personal loan:
- Do the math to find out whether there is a substantial interest rate advantage in a balance transfer. Use an EMI calculator to find out whether making a transfer is proving to be an advantageous proposition.
- Negotiate the processing fee with the new lender and see if it can be waived off
- Avoid getting into a debt trap by making regular repayments on your existing credit lines.
However, if you do arrive at a conclusion that a balance transfer is an answer to your debt situation at hand, do reach out to us at RuLoans. We are happy help to help you with all your credit needs.