Mistakes To Avoid In A Balance Transfer
Here is a closer look at some of the most frequent balance transfer mistakes consumers make and how you can avoid them. Read Now!
Since money is of utmost importance, all decisions about money must be dealt with utmost care. The interest rate on loans determines how much borrowers need to repay to the lender. Many loans come with high interest rates, meaning high EMIs. But there are some ways that can help save money on the interest, helping to lower the EMIs.
One way by which borrowers can save money is by moving the outstanding debt on a loan from one lender to another for a lower interest rate. This is known as balance transfer.
What Is Balance Transfer?
A balance transfer is essentially a type of money-management solution in which a high-interest debt is moved to a low-interest loan. Usually, the existing lender charges the borrower a fee to transfer the existing debt to another institution. Many banks also allow a top-up loan on balance transfer, particularly for personal loans and home loans.
Balance transfer is a great way to pay off the debts faster. The amount of savings depends on the new interest rate and the length of the loan. Balance transfer is a great way to manage finances as borrowers not only get a better interest rate, but can also reset the tenure of the loan as per their repayment capacity.
To initiate a balance transfer, borrowers first need to apply with a fresh loan application in the new bank. To qualify for the best offers, a good credit score of 700 and above can be of great support. Applicants must also provide all relevant documents as required by the lenders. Once the process is initiated by the lender, it may take a few weeks for the application to get approved. Once the application is approved, the old balance and the balance transfer fee will show up in the new account.
The details associated with these transfers are numerous. So, mistakes are common in balance transfer. Here is a list of some common mistakes that people make in a balance transfer and how to avoid them.
• Calculate The Actual Interest:
The main reason for a balance transfer is a lower interest rate. But people mostly end up with a lower rate of interest for a longer tenure, ultimately paying more. Keeping lower interest on a loan helps to save more only if the tenure is less. Also, longer-dated debts are riskier as it increases the chances of loan defaults.
It will be wise to opt for a balance transfer only after calculating the total costs and savings. Additionally, the type of interest also matters. A fixed rate of interest costs more than reducing rates. But the latter may change in future depending on the market.
• Credential Of The Lender:All lenders offer loans on varying terms and conditions. Some of these conditions can be tricky. Before signing the final loan agreement, it will be prudent to properly check about the lender’s reputation in the market. Borrowers should read testimonials and look out if there are any red flags associated with the lender.
• Timing Of The Balance Transfer:Most people opt for loan transfers during the last few months of the loan tenure. It is ideal to transfer the loan within the first half of the loan tenure, else wait for the existing loan to mature.
• Processing Fees and Charges:One very common aspect which borrowers mostly overlook is the fees that the lending institutions charge for balance transfers. Most balance transfers come with a transfer fee as well as expenses on stamp paper and other related charges. Most lenders charge a flat fee or a percentage of the outstanding balance, whichever is higher. If the overall cost of balance transfer as per the new loan agreement is more than the total interest on the existing loan, then the entire purpose of balance transfer is defeated.
• Collateral:Sometimes lenders may ask for a collateral, especially if the loan amount is higher. Often, borrowers offer a higher value collateral than the required loan amount. One should do proper calculation and avoid offering a high value collateral.
Balance transfer can save money because borrowers ultimately pay less than what they would have otherwise paid. It works on loans such as home loans, education loans, etc. as well as credit cards. It can be used to transfer the principal amount of the loan to a new bank.
However, most credit card providers do not allow balance transfer to another card owned by the same provider. If banks permit an existing customer to transfer balance between their two cards they will end losing money on interest charges.
Balance transfer is a great way to save on interest rates as one repays EMIs, but there are certain mistakes to be avoided in order to save more. One of the most common mistakes is miscalculation of the loan tenor. The whole purpose of a balance transfer is undermined if the EMIs paid is lower but for a longer period.
If you want to simplify your financial problems, avail of a loan from IIFL Finance. The biggest benefit of IIFL Finance loan products is that it has a quick processing time followed by instantaneous disbursals. Applicants with a good credit score can take additional advantage of lower interest rates.