Friday, September 30, 2016

Balance Transfer For Better Loan Interest Rates

A home loan is generally for 20 years. It involves a great amount of money and hence the interest rate on the amount is a matter of concern for every borrower. 

If the borrower has diligently paid his EMIs for few years, he can look for reduction in interest rate. 

Nowadays the most common way to reduce the interest rate is to either go for balance transfer or talk to the bank that has provided you the loan to reduce it.

What is a Balance Transfer?

Balance transfer of a loan happens when the entire unpaid principal loan amount is transferred to another bank for a lower rate of interest. 

The bank that had originally extended the loan to you gets the unpaid amount and you have to, in turn, now pay your EMIs at the new rate to the bank that had taken up the loan. 

Almost every bank in the country has the facility for the home loan transfer and if you are paying your EMIs regularly, there often no problem associated with it.

How do Home Loan Transfers Work?

Home loan transfer works best if you are in the early period of your home loan. In such case even a 50 basis point reduction will be very beneficial. 

For example, if Rs 50 lakhs is left unpaid for your home loan and your current interest rate is 12%, you would have to pay Rs 58,01,513 as interest. 

If you opt for a balance transfer and your new interest rate is at 11.5%, your interest outgo over 15 years would be Rs 55,13,708. or a total savings on interest of Rs.2.87 lakhs. 

Generally banks do not like it that their diligent customer go to another bank, so in most of the cases the bank gets ready to either lower the interest rate or cut down the tenure period. 

Like if your loan still has to go on for 15 years then bank will reduce the tenure by 1 year. 15 year loans will be reduced to 14 years.

The choice between balance transfer and resetting a loan rate with existing bank at the end of the day depends upon the outstanding loan and tenure period left, the difference in rate and the time taken to get the work done.

Balance transfer is a simple process and it can be done with simply writing to your bank. You can also pit your bank against another bank which is offering you lower interest rates on home loan transfer. 

The other bank that gives you lower interest rate will check your credit background and if they are not satisfied with your creditworthiness they might reject your balance transfer application.

The main reason for borrowers to switch their loans is relatively higher interest rates from the existing lender. 

 When the Reserve Bank of India changes rates, lenders should comply. Sometimes even if they do cut rates the reduction may not be in line with what RBI did. Another reason for balance transfer may be unsatisfactory services or a need of a top-up. 

As we can observe that balance transfer is a time consuming and a tedious work, so one should properly weigh the decision of transferring the balance.

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