Balance transfer of loan takes place when you swap or transfer the principal outstanding on an ongoing loan for another loan that provides a lower interest rate or better features. Balance transfer as a feature can be exercised by anyone who currently services a loan and is possible for any type of loans, which include personal loan, car loan, education loan, home loan among others and every bank has this option. However, a balance transfer is no more limited to only banks and peer-to-peer loans can also play a big part in it.

A balance transfer is an important feature available in the financial system, but sadly very few avail of it. While many are not aware of it, others are turned off by the sheer hassle of approaching banks, filling up paperwork, giving documentary evidence among others. Balance transfer is a significant feature that should be exercised to reduce your interest rates and thereby EMI. The primary logic is that a borrower’s financial condition and what he or she earns only increases over time. A loan taken two years ago would have been based on a different salary or earning structure, which should have changed for the better now. This means an individual’s repaying capacity would have increased and balance transfer is a great way of resetting your EMIs and ensuring you get the benefits of a lower interest rate. In fact balance transfer is such an important factor that every borrower should exercise it at least once during the tenure of the loan.

Why it makes sense:

Let us take an example to make things clearer. Imagine you have a personal loan for Rs. 3, 00,000 for tenure of 3 years at 20% interest rate, your monthly EMI comes to Rs. 11,149.08. The total interest you would pay for the duration of your three year loan will come out to be Rs. 1,01,367. This means for a 3 year loan of Rs. 3 lakh, you are repaying back about Rs. 4 lakh.

However, things can change if you go for a balance transfer after say about 1. Let us assume the you now get an interest rate of 14 % for the outstanding principle. At the end of the first year you would have paid Rs. 80,941 as principle and Rs. 52,847 as interest. This would mean the principal outstanding would be Rs. 2,19,059. The calculation would then look like this.

A balance transfer of the outstanding principle, if rounded off to Rs. 2, 20,000, your monthly EMIs will come down to about Rs. 10,563 while your total interest payable will drop to Rs. 33,508. Including the interest you of Rs. 52, 847 you paid for the first year, the total interest you have now paid for your 3 year loan is Rs. 86,355, which means a savings of Rs. 15,012 in interest.

                  Principal            Interest Rate         Tenure           EMI          Total Interest          

                                                                                                       (Rs)            Payable (Rs)                    

Original      3,00,000                     20                        3              11,149            1,01,367               

After BT     2,00,000                     14                        2               10,563             33,508 

Savings Calculations:

Total Interest payable -                     Rs. 1,01,367

Less – Interest paid 1st year -           Rs. Rs. 52,847

Interest left for next 2 years -          Rs 48,520

Interest payable after BT-                 Rs 33,508

Savings -                                               Rs 15,012

Role of P2P

Balance transfer is a good way of cutting down on the interest outgo on a loan, but going through banks can be lengthy and cumbersome. Banks need a range of documents, charge a processing fee and there is a certain amount of running around that one needs to do.

P2P is ideal for anyone looking to carry out a balance transfer. Peer-to-peer is well known for the competitive rates it provides and one can be certain that it will be substantially less than what they are paying in the form of interest. P2P is also known for its speed, so getting a new loan for balance transfer can be done at a minimum fuss. Borrowers are waking up to the potential of replacing their high interest bearing loan from a bank with that from a P2P site. Also, P2P loans do not have repayment charges, so at any point after a balance transfer, if you wish to pay off the remaining principal amount, it can be done almost instantaneously.

Although relatively new as a finance option, P2P can play a great role in balance transfer of loan and ensure that individuals can lower their debt burden.

Sign Up now! And balance transfer your existing loans at lower interest cost. Because every % counts!