One of the common reasons for individuals to choose to transfer a loan from one institution to another, whether it be a Bank or a NBFC is the offer of a lower interest rate. However, though the offer of paying lesser interest sounds extremely tempting, there are many other factors that you need to consider before you take the decision. It is possible that though the deal seems better according to your calculations as per the drop in interest rate, the deal is actually going to either be exactly same or worse than your current deal.
Let us discuss few other factors that need to be taken into consideration before you begin the process of transferring a loan:
Fees and charges
There are a few costs like processing fee, stamp duty, valuation charges, etc. that go hand-in-hand with a loan, whether it be a new loan or a loan transfer. These additional costs need to be confirmed with your new bank and calculated before finalising your deal of loan transfer. The methods of charging these fees differ from institution to institution.
Total Outflow of Cash
Your offer of a lower Interest Rate might not be as simple as it looks. Lower interest rate when teamed with a longer tenure can be hazardous for your cash outflow.
Let us look at an example: In case you have taken a loan of INR 50,00,000 at 10% p.a. for 5 years, it would mean a payment of INR 5,00,000 as interest every year. Thus the total amount of interest payable through the course of the loan would be INR 25,00,000.
Now considering that you get an offer to transfer the loan for 9% p.a. for 4.5 years after having completed the tenure of 1 year with the current lender, it would mean a payment of INR 4,50,000 every year for the next 4.5 years. Thus the total amount of interest payable through the course of the loan would be INR 20,25,000. Considering that you have already paid INR 5,00,000 as interest for the first year, your total interest payment goes from INR 25,00,000 over a period of 5 years to INR 25,25,000 over a period of 5.5 years.
This happens because interest is calculated on the outstanding amount of the loan and a longer tenure means higher interest payable. It thus ceases to be a better deal, even without considering the efforts you would have to put in for documentation of the takeover.
Loan-to-value (LTV) Ratio
Loan-to-value (LTV) ratio is the ratio of the loan amount to the value of the collateral against it. If the loan that you are planning to transfer is a Secured loan taken against a collateral, it is advised to check the valuation of the collateral before going for a transfer. It is possible that the valuation of the collateral may have increased. In case of real estate, the increase in collateral can be a huge increase, thus increasing the loan-to-value ratio in your favour.
Additionally, if majority of your loan amount has been repaid by you, the loan-to-value would already have tilted in your favour by now.
In either of the cases, since the LTV is in your favour, you can offer another collateral of lesser value to secure the loan. Thus your original collateral can be used to further raise funds, if required. Some Banks might insist on the same collateral to be used to secure the loan. In such cases, you can bargain further with the Bank with regards to the interest rate being offered.
As a package deal, Banks have been known to provide additional services like credit cards and personal loans to their loan transfer clients at no additional cost. They waive off the joining fees or the processing fees and lure clients. However, hidden charges might be involved which need to be checked. Additionally, there are times when individuals get attracted by the terms ‘free’ and/or ‘discount’ and utilise such services even though they do not really have a need for the same. It is important to check with yourself before agreeing for any add-on services whether you actually require the same.
The Terms and Conditions
Ensuring that the Terms & Conditions that you are signing up for are as per your expectations and that you are making an informed decision after understanding each and every clause is significant. In case if there is any point that you do not understand, it would be right to take help or advise from an expert.
If you have had a long standing relationship with your existing bank, there is a possibility that there are additional soft benefits that you are utilising. In case of a loan transfer, you will also be required to open a Savings account for EMI pay-outs with the new bank. In case if you are not planning to make the new account the primary account for your business, it would be alright. However if you are planning to shift your primary account, do reconsider your decision. It would be advised to wait for a few months before your close your account with your existing bank.
After taking into consideration all these factors as well, if the deal that you are being offered still sounds great, it certainly must be a great deal!