Pros and Cons of Personal Loan Balance Transfer

Personal loan balance transfer offers are known to provide respite from high-interest rates, allowing borrowers to opt for more affordable loans from a different lender, who is willing to take over existing outstanding debt.

You probably are wondering why one must first opt for a personal loan product with a high-interest rate and then try to get it refinanced.  It is common practice for borrowers to carefully research personal loan offerings before they avail a loan that best suits their needs and affordability.

Even if you do choose an affordable personal loan, volatile market conditions may cause lending rates to drop but these rates may not apply to your loan which is already being serviced. As long as the interest you pay is not drastically different from market rates, you’ve no reason to worry, especially if you are comfortable with the other terms and conditions and the services offered by the lender.

If you are paying significantly higher interest and feel that you can make use of the interest savings for other essential expenses, you may check out balance transfer offers from reputed and credible lenders to find one that fits your requirements. Balance transfer offers may not be beneficial for everyone.  They have their own benefits and drawbacks.

Salient Benefits of Personal Loan Balance Transfer

Low-Interest Rates

As explained earlier, lending rates are subject to periodic changes based on the economic developments in the country.  Personal loans are usually offered on fixed or floating interest rates. While lenders are free to change the floating rates during the loan tenure, the fixed interest rates remain unaltered through the course of the loan.

A couple of years into the loan tenure,  if you find yourself paying a hefty interest, you may consider a viable balance transfer offer that promises a lower interest rate to save some of that hard-earned money for more pressing expenses.

Choice of Loan Term

Any drastic changes in your disposable income or expenses during the course of your personal loan are directly bound to impact your capacity to make monthly repayments.

A recent promotion or salary hike, monetary gift or inheritance, or any other event that assures a steady higher income enables you to repay your personal loan well ahead of the chosen tenure. However bulk payments or foreclosure of your existing personal will incur a penalty. You can avail a balance transfer offer to pay off your outstanding debt faster by opting for a short loan term.

If your expenses are on the higher side and you prefer a more affordable EMI, you may choose to settle the outstanding personal loan balance over a longer tenure (maximum 5 years).

Higher Loan Amount

Very often people rely on personal loans to fund medical expenses, small home renovations, business expenses and other similar requirements where the budget can get out of hand if things don’t go as planned.

Balance transfer offers are usually bundled with top-up plans, using which you can opt for an additional loan over and above the personal loan balance being transferred, provided you satisfy the eligibility criteria.

Debt Consolidation

Due to the relatively lower interest rates, you can avail balance transfer offers to consolidate multiple high-interest loans and credit card debts so that you will need to actually settle just one (probably hefty) personal loan without spending a fortune on interest payment.

Notable Drawback of Personal Loan Balance Transfer

Getting Deeper into Debt

As long as you get the personal loan balance transfer to a new lender for a lower interest rate and perhaps a comfortable loan term, you can quickly get out of debt. If however, you settle for a top-up loan just because funds are available you are at risk of getting deep into debt for no compelling reasons.

If you plan to consolidate credit card debt through balance transfer offers, make sure to cancel the credit card to avoid accumulating dues!

Pre-payments and Foreclosures

Though balance transfer offers to offer some respite from the burden of debt, you may not have the opportunity to settle the loan either partly or fully before the loan term. Usually, lenders do not permit pre-payments or foreclosures of refinanced debts. It is important that you carefully verify the exit criteria of refinanced loans before opting for one!

Overpaying Your Loan

Though a known fact, you must remember that when you extend the loan term while opting for a personal loan balance transfer, you always have a risk of paying excess interest, which at times may far exceed the actual amount you borrowed.

Costs of Balance Transfer

Costs of a transferring your personal loan balance are bound to be higher than that of the original loan as you are bound to pay a significant penalty/fee to foreclose the current debt far before the due date.

In addition to foreclosure charges payable to the old lender, you will be paying a processing fee to get the loan refinanced. In some cases, your new lender can offer to waive the processing fee for the fresh loan, but you may need to open a new bank account to get top-up loan amount credited or even pay your monthly EMIs and are likely to be charged for the services.

Watch out for any other pre-requisites that may incur additional expenses from your side.

While balance transfer offers are indeed great alternatives to a punishing personal loan, it is important to remember that you may not really require it.  Try and sort out any small grievances with your current lender before planning to switch lenders. Carefully read the balance transfer offers, compare them and understand the terms so that you make a well-informed decision.