Balance Transfer(BT) is a facility where in you transfer the balance outstanding on a loan or credit card to another bank at a lower interest rate. If used judiciously, it provides great savings. But the hard fact is that very few avail of it as not many are aware of the benefits.
Ideally doing BT during the initial stages of your repayment tenure is much more beneficial as you can take advantage of the lower interest rate for a longer period. Also individuals with bad credit ( low CIBIL scores) can save more by opting for BT once their CIBIL scores have improved. For e.g.: if you took a personal loan at 20% interest rate a year back and your CIBIL score has improved during this period, you may qualify for a BT at 14%; which is a cool 6% lower.
Some banks charge a foreclosure fee as a % of your outstanding principal balance, if you pre-pay your loan. The BT might entail some processing fee too. So this is an additional cost that you may incur while availing BT. So understand the exact cost of the BT and the total amount you will end up repaying; compare this against the total amount you will pay if you continue with the same loan.
The following are the typical steps in a Balance Transfer. Each lender’s actual steps might vary depending upon their internal processes.
#1 Seek a foreclosure letter, statement of account and list of property documents from your current home finance company
#2 Compare and choose a home finance company
#3 Loan application, income and identity documents to be submitted to the new home finance company
#4 Credit appraisal by the new lender, including field investigation and loan sanction
#5 Offer letter from new lender
#6 Submission of legal documents and legal check
#7 Technical and valuation check of the property
#8 Signing of agreements and submission of post-dated cheques to new lender
#9 Disbursement of loan favoring old lender
Here are some tips to help you while opting for Balance Transfer.
#1. Calculate whether it still makes economic sense to refinance; considering the fees and charges you might be forced to pay.
#2. Confirm with the new lender that the low rate is not a teaser rate that will be contractually raised after say 6 months or pre-determined minimum period. Read the fine print.
#3. Ensure that your paperwork is in order for the new lender, especially the property ownership papers, otherwise the disbursement can get delayed.