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What Is Balance Transfer Of Loan? Should You Go For It?

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Balance transfer of loan is a situation in which the entire unpaid principal or the outstanding amount of the loan is transferred to a new lender for a lower rate of interest as well as better features and service aspects. And herein the bank that originally had lent you the amount is paid the unpaid loan amount and you as the borrower needs to service EMIs at the revised rate of interest decided by the lender who takes over your loan account now.

 

The facility of balance transfer of loan is available on almost all loan types including home loan, loan against property, education loan, personal loan, auto loan to name some. Besides this feature of balance transfer of loan is dealt by with every financial institution or lender in India.

How to decide on Balance transfer of loan?

How to decide on Balance transfer of loan?

For big-ticket size loans such as home loan or loan against property or for any other loan category for that matter merely switching to a new lender for lower interest rate without doing the cost benefit analysis may be detrimental. This is because for this facility, lenders levy a processing fee and in the condition when there remains only few years for the loan tenure to end or where the unpaid amount is low, balance transfer will do no good.

And by and large if you are in your initial years of servicing EMIs towards the loan, balance transfer of loan for even a 50 basis point reduction in interest rate, will go a long way in saving a huge interest outgo for you. 1 basis point is one-hundredth of a percentage point.

Say for instance:
 

Say for instance:

On your home loan, Rs. 50 lakh is the outstanding principal amount which was secured at an interest rate of 12% and this would translate to a interest payment of Rs. 58,01,513. But in case the interest by way of balance transfer of loan gets reduced to 11.5 percent, over the 15 year loan tenure you would be required to pay an interest of Rs. 55,13,708, implying savings of close to Rs. 3 lakh.

Now here in it is to be noted that such a facility is available easily to those borrowers who have had a clean credit repayment history i.e. have not defaulted on previous EMI payments. Plus there is documentation work which needs to be completed.

Documentation requirement for balance transfer of loan:

Documentation requirement for balance transfer of loan:

In a case if it is a pre-approved loan for you say as in when you transfer your outstanding debt on other credit cards to HDFC credit card, there is no documentation needed. But say in case of a home loan balance transfer, the documentation requirements can be broad based and may require you to produce all such documents:

1. Consent letter for the balance transfer of loan from the existing lender

2. Loan agreement from the existing lender

3. NOC

4. Foreclosure letter from the first lender

5. Property documents- Documents that prove your ownership in the property, Registration certificate, stamp duty papers and payment receipt

6. Home loan statement

7. Post dated cheques

8. KYC

9. Financial documents as a proof of your income and supporting your loan repayment capacity such as salary slips, form 16 and bank statement of your salary account.

Advantages of Balance Transfer of loan

Advantages of Balance Transfer of loan

If your savings due to the lessened interest outgo over the loan tenure due to balance transfer of loan to the new lender is over and above the processing charges involved in availing the balance transfer facility, one should surely go for it. Besides there is a top-up loan provision that is available with balance transfer of loan which should be opted for only in case of a dire emergency.

Also, balance transfer of loan should be viewed as a way to reassess your debt and through frequent balance transfer in case of longer tenure loans such as home loan you should aim at repaying and clearing your debt soon.

GoodReturns.in

Read more about: loan
Story first published: Friday, November 6, 2020, 17:18 [IST]
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