A balance transfer happens when you move a loan balance from one lender to another. To make that happen, you need to get an ew loan that will pay off an existing loan. After the transfer is completed, you don't owe any more or less than you did before – you just owe somebody else.
Balance Transfer concept came up with credit cards first ie transfer of your outstanding balance from one credit card provider to another. The main reason behind this was to transfer your debt from the credit card with a higher interest rate to a credit card with a lower rate of interest. It was also used smartly by a few who transferred money from one credit card to another by rotation to avoid late fees. This transfer was available at low or no cost by banks as in most cases the customer would pay the minimum balance due and pay an interest on the balance outstanding.
This facility has now been extended to other debt instruments such as personal loans, home loans and so on. The idea of a Balance Transfer for a personal loan is to shift your outstanding loan amount from one bank to another. There are many reasons to do a Balance Transfer including:
Better Interest Rates - You have taken a loan from Bank A while working in a mid size company. You have now moved to a Category A (large and established) organization to which banks offer a better interest rate. If the probability of the current lender reducing the interest rate is low, you can move your outstanding loan amount to Bank B with an minimal charge and would end up paying lower EMIs.
Offer by banks on Balance Transfer – Let us assume that you have taken a loan from a bank and have been paying the instalments on a regular basis. Your profile too matches the ideal or favourable criteria of any bank. In this case, other banks would want to acquire you as a customer as they would be sure of your intention and ability to repay based on past records. In such a case multiple banks will be willing to offer an interest rate lesser by a sizeable percentage of about 2% - 3% if you undertake a Balance Transfer.
Service Challenge with a Bank – There could be an instance where you are not happy with the service provided by a bank and would want to move out of an association with them. You can undertake a Balance Transfer to migrate to a bank that offers better service.
Top-up Loan – A final scenario when you would want to go for a Balance Transfer is when you need to borrow more money. If you already have a regularly-serviced loan with a certain bank and are in need an additional loan (called a top-up), a separate bank might be willing to offer it at a better rate if you agree to transfer the outstanding balance of your current loan to them.
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