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Business News/ Money / Personal loan balance transfer: How to refinance your debt? MintGenie explains

Personal loan balance transfer: How to refinance your debt? MintGenie explains

When you refinance your current personal loan with a new lender—ideally one that has a lower interest rate—you are transferring the balance of your loan. By doing this, you may be able to reduce the amount of interest you pay overall during the loan's term.

Balance transferring a personal loan is now common amidst rising interest rates.Premium
Balance transferring a personal loan is now common amidst rising interest rates.

A personal loan balance transfer is when you refinance your current outstanding debt with a different lender with, ideally, a lower interest rate. This can save you money on the long-term cost of interest while dramatically reducing your equated monthly installment (EMI). Here are some ideas on how to transfer your loan:

  • Estimate your eligibility to gauge the interest rate: Speak with plausible lenders and inquire if you qualify for a loan balance transfer. They can verify your credit score, income, and job stability. After that, you can evaluate a personal loan balance transfer calculator to shop your attainable interest. You can decide whether or not the financial savings are profitable in that manner.
  • Compare interest rates and fees: Don’t settle for the lowest headline interest rate. Examine the Annual Percentage Rate (APR), which covers interest and any fees related to the loan. Include any balance transfer costs, processing fees, and prepayment penalties imposed by both the old and new lenders.
  • Collect required documents: After narrowing down your list of potential lenders, gather the paperwork you’ll need to submit your application. These usually consist of your most recent bank statement, pay stubs, loan statement, and Know Your Customer (KYC) paperwork.
  • Apply for the loan: Send the selected lender your loan application. They will quickly settle your outstanding personal loan after it is accepted. Post your loan application, you’ll start paying the new lender back through EMIs at the new interest rate.

However, not all lenders offer balance transfers for personal loans. Some lenders focus more on creating new loan products rather than refinancing existing loans from other banks. They may find it more profitable to issue new loans rather than accept balance transfers, especially if they need to offer significantly lower interest rates to attract customers.

Also, prepayment penalties should be considered when evaluating a personal loan balance transfer. Compare the potential interest savings from a lower interest rate on the balance transfer loan with the prepayment penalty on your existing loan.

Recognise that there are drawbacks to extending the loan term during a balance transfer.  By extending the loan period, you might potentially make your EMIs more reasonable for your budget by reducing them. If you’re having trouble paying the current interest on your debt, this might be useful. You will pay more interest overall if you take longer to repay the loan. Throughout the longer time, you will pay more in interest charges even though the EMI is smaller. Finding a balance transfer with a reduced interest rate and a period that permits a comfortable EMI without appreciably increasing the overall amount of interest paid is the perfect situation.

Frequently Asked Questions (FAQs)

Q. What factors influence my ability to qualify for a personal loan?

Your eligibility for a personal loan is determined by myriad factors, some of which are given more weight by lenders than others. These are the main ones:

  • Credit score: An important consideration, since it indicates your creditworthiness and historical payback patterns. A credit score that is typically greater than 700 indicates that the borrower is responsible, which raises the likelihood of approval and may result in a cheaper interest rate.
  • Income and employment: To evaluate your ability to repay the loan, lenders look at the steadiness of your income. To determine your future financial security, they usually look for a minimum monthly income and take your work history into account.
  • Debt-to-Income Ratio (DTI): This ratio evaluates how much of your gross monthly income is allocated to paying off debt (such as credit card payments, existing loans, etc.). A lower DTI suggests that you have more money available to handle loan repayment, which makes you a more appealing borrower.
  • Age: Minimum and maximum age limitations may apply to certain lenders.

Q. My credit score is low, can I still obtain a personal loan?

It is feasible to obtain a personal loan despite having a low credit score, but there are obstacles to overcome. Below is a summary of what to anticipate:

  • Higher interest rates: Because of your low credit score, lenders view you as a higher-risk borrower, and they will usually charge you a higher interest rate to offset the increased chance of you defaulting on the loan. This implies that over the course of the loan, you will pay higher interest overall.
  • Stricter loan terms: Lenders may place stricter terms on your loan in addition to a higher interest rate.
  • Lenders for bad credit: Some lenders specialise in working with consumers who have bad credit. 
  • Obtaining a personal loan with a low credit score is more difficult, but it is still feasible. You may make an informed decision about borrowing by being aware of the difficulties and considering all of your options.

Q. What distinguishes an unsecured personal loan from a secured one?

An unsecured personal loan does not require security, but a secured personal loan does, such as an automobile or other property. Because they provide a greater risk to the lender, unsecured loans usually have higher interest rates.

Q. What should I think about before applying for a personal loan?

Before taking out a personal loan, think about the interest rate, length of loan, total cost, any extra costs, your ability to repay the loan, and how the loan will fit into your entire budget.

  • Need vs want: Consider carefully why you require the loan. Is it for a non-essential item like a vacation, or is it for a vital expense like auto repairs or medical bills? Not always wants, but rather critical or urgent necessities are the greatest candidates for personal loans.
  • Cost of the loan: The interest rate on a personal loan is not the only factor to consider. Think about the Annual Percentage Rate (APR), which takes into account both the interest rate and any other loan-related costs. If you intend to pay it off early, be sure to account for origination fees, late payment penalties, and prepayment penalties.
  • Your spending cap: Can you comfortably make the loan installments each month on top of your current debts? To determine the monthly payment based on the loan amount, use a personal loan calculator. Remember to account for the possibility of interest rate increases.
  • Impact on credit score: Obtaining a loan may cause a hard inquiry to be placed on your credit report, which may temporarily reduce your credit score. On the other hand, over time, timely payments might raise your credit score.

Look into other options before taking a personal loan. If you qualify, think about using your savings, transferring high-interest debt to a 0% APR balance transfer card, or searching for loans with reduced interest rates, such as home equity.

Q. How much time does it take for approval of a personal loan?

Numerous variables can affect the personal loan approval procedure, such as:

  • Lender: Compared to the internet lenders, traditional banks may have a more rigorous application process, which could result in longer wait times.
  • Loan complexity: Less complicated loan applications for lesser sums could be accepted more quickly than more complex ones for larger sums.
  • Your accountant profile: Strong credit scores, reliable income, and a low DTI help borrowers get approved more quickly than less well-suited applicants.
  • Requirements for verification: The process may take longer if the lender has to confirm any of the information you submitted (such as your income or place of employment).

Although certain lenders may provide almost immediate approvals, particularly for online applications, it’s usually reasonable to anticipate a waiting period of several hours.

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Published: 22 May 2024, 02:26 PM IST
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