Banks often try to woo customers with the loan balance transfer facility, offering various benefits to persuade them to transfer their loans from other banks. As per norms set for lending, you can transfer any type of loan, whether it’s a home loan or a personal loan, from one bank to another.
Borrowers usually opts for the transfer or refinancing of their loans when they receive a better offer from another bank. This could involve a lower interest rate or other favourable terms. Therefore, the primary objective for the borrower in opting for a loan transfer is to reduce the overall burden of debt.
How does loan balance transfer work?
When you transfer your loan from one bank to another, your new bank pays off your existing loan. If your current loan includes a prepayment clause, you need to bear those charges. Also, you might have to pay the processing fees for your new loan. However, with a lower interest rate, you can save on that front.
When you compare your loan interest rate with that offered by another bank and find that you’re paying a higher rate, you might feel inclined to transfer your loan to the bank offering you a better deal. While a loan balance transfer facility can potentially save you money by moving your loan to a lender offering a lower interest rate, it’s crucial to consider how this transfer will impact your credit score and the initial charges you may incur during the transfer process.
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Loan transfer warrants new hard credit inquiry
When you approach a financial institution for a loan balance transfer request, the lender as per standard practice fetch your credit score report to assess the risk of lending you money. This process is known as a hard inquiry, and each hard inquiry can cause your credit score to fall by a few points. Credit inquiries are one of the significant factors affecting your credit score.
“Refinancing involves taking out a new loan to pay off an existing one, which requires a credit check and can lead to a hard inquiry on your credit report. Just like with credit card balance transfers, refinancing can initially lower your credit score due to the hard inquiry, but managing the new loan responsibly can potentially improve your score over time by reducing your debt-to-income ratio and demonstrating consistent, on-time payments,” says Adhil Shetty, CEO, BankBazaar.com.
Hidden charges for refinancing a loan
On top of that, there may be associated costs or hidden charges for loan transfer, which could make the transfer more costly. Therefore, it’s important to fully understand all aspects of how a credit balance transfer can impact your credit score before making a decision.
“You can transfer most loans, including home loans and personal loans. Do not transfer your loan frequently, as there are associated costs that make the process more expensive. For instance, personal loans have a prepayment charge associated with it. There would also be processing fees, legal charges, stamp duty, and other charges associated with the loan,” Shetty said, adding that unless there is a significant difference of more than 0.5-1% in the interest you are paying, refinancing may be premature as these costs would eat into any savings you may make by refinancing the loan. Also, negotiate with your lender for better rates before opting for refinancing, he advised.