How a personal loan balance transfer affects your credit score

Most people take a personal loan thinking they can manage the EMI with their current financial standing. This can change over time, with rising expenses, current interest rates may feel high. This leads to several borrowers to explore the option of moving to a new lender and make a personal loan balance transfer. 

A balance transfer can help reduce your EMI, even lower your interest rate, and make repayment of loans easier.

This article explores how a balance transfer works, its impact on your credit score, key factors and benefits and see if this move aligns with your financial goals and debt liability.

What is balance transfer?
 

To understand personal loan balance transfer, you must first know what it means. When a borrower shifts from the current lender to a new lender that offers better loan terms and lower interest rates. The new lender pays off the current lender’s all outstanding dues and forecloses the loan. After which, the borrower pays the new lender as per the new interest rates. This helps the borrower save on interest costs, get a lower EMI, while increasing ease of repayment.

It is important to note that a balance transfer does not reduce your principal amount. It simply replaces your existing loan with one that has better terms.

Impact of Personal Loan Balance Transfer on Your Credit Score
 

A personal loan balance transfer impacts the credit score in a straightforward manner in terms of regular repayments, hard inquiries and loan closures. Listed below are the notable areas it impacts:

1. A short-term dip due to a hard enquiry
 

New credit inquiries lead to a credit history check made by the new lender. This will trigger a hard inquiry, which could lower your credit score for a short period of time. This is typical with any new inquiry made for loans or credit cards.

2. A positive impact when your old loan is closed
 

Once the transfer is approved, your old loan gets marked as closed in your credit report. A closed loan with a regular repayment history strengthens your credit profile and reflects responsible borrowing, giving your credit report a boost.

3. Long-term improvement through better repayment discipline
 

After the loan transfer, your new EMI may be reduced because the new personal loan balance transfer is better. Lower EMIs help manage repayment, reducing the chances of missed payments. Consistently paying EMIs on time improves your credit score over time and helps build lender confidence for future credit.

4. No long-term negative impact
 

A balance transfer does not harm your credit score permanently. The temporary dip due to the loan enquiry is small and typically recovers with timely and consistent repayment of EMIs.

When is the Right Time to Transfer Your Balance Personal Loan
 

A personal loan balance transfer is recommended during the below listed conditions. They are:

1. If the new interest rate is significantly lower
 

A balance transfer makes sense only when the new personal loan balance transfer interest rate is significantly lower than the existing interest rate. Even a small difference in percentage can reduce the overall repayment cost in the long run. However, if the difference is too small, the saved interest may not even cover loan processing fees or foreclosure charges.

2. When your credit score has improved
 

A current higher credit score than the time of loan approval may qualify a borrower for a cheaper rate of interest. In that case, transferring the loan can lower your EMI and give long term savings.

3. When there is a long tenure left
 

A longer remaining loan tenure can lead to higher savings on the overall interest paid. A balance transfer in personal loan for a short period may not be financially viable in terms of miscellaneous fees associated with making a change in lenders.

4. When your existing lender is not offering better terms
 

If your current lender refuses to renegotiate payment terms, reduce interest rate, or tenure, switching lenders can help in securing flexible terms and improve ease of repayment.

5. When repayment is becoming difficult
 

If EMI becomes unaffordable, a balance transfer with a longer tenure or lower rate can reduce the credit burden significantly. This lowers the risk of late payments, while protecting the long-term credit score.

Who is eligible?
 

All lenders, whether banks or NBFCs have a specific requirement for borrowers to be eligible for a new loan. Listed below are some typical eligibility parameters for a personal loan balance transfer:

1. A minimum of 12 EMIs paid on the previous lender’s loan.
2. A credit score of 750 or above.
3. Proof of income for salaried and self-employed individuals
4. Proof of tax payments
5. No loan defaults in the credit history
6. Recent bank account details.

How to check if the transfer is beneficial?
 

There are some crucial factors to ensure if the personal loan balance transfer is beneficial for the borrower. Let us see a few crucial factors:

· Calculate cost of outstanding interest: Check how much interest you will pay if you continue with your current loan. Compare this to the payable interest after transferring. If the savings are significant, the transfer is worth considering.

· Include all miscellaneous loan fees: Borrowers must include all loan associated costs like processing fee, loan foreclosure fee, stamp duty, etc. The new loan should be cheaper in the long term in comparison to the existing loan.

· Use EMI calculators to compare repayment: Using an online calculator helps you see your new EMI, total interest, and possible savings in seconds. This helps in making an informed decision and increases your savings in the long-term while improving your credit score.

Conclusion
 

A personal loan balance transfer is most effective when it offers a substantial financial advantage by lowered interest costs or improved repayment terms. The credit score enquiry may create a temporary dip, but this improves once the previous loan is closed and regular payments are maintained.

Before proceeding, assess eligibility, compare lender policies, and calculate the overall savings after all charges.

You can easily apply for a FIRSTmoney personal loan to fulfil all your urgent financial needs. Enjoy attractive interest rates starting at 9.99% p.a, instant disbursal within 30 minutes, and flexible tenure with a completely digital process.