With so many options and ways to get a loan, almost everyone nowadays has or is planning to take out a loan. With the rise of economic ways to prosper, many banks and financial agencies offer loans to help clients and borrowers ease their way in everyday financial situations.
As people now choose loans for many various reasons, the demand for loans continues to rise and it is not unusual for people to carry multiple loans at one time.
Because of this, many borrowers are choosing different ways to lighten their loans by exploring options that can ease up their debt and guarantee a better outcome. This opens the world of balance transfers.
Defining Balance Transfer of Loans
A balance transfer of loans is the process of transferring your current loan or outstanding loan balance to another bank, financial agency, or online lenders. Generally, this is done by borrowers to significantly reduce the amount of interest their loan has by applying for a new one.
This option is an excellent way to lessen the burden of loans that tend to have a longer repayment time.
A balance transfer of loans can also be technically viewed as a new loan but to a different lender. It doesn't affect your previous lender, as your loan is now in the hands of the new bank.
A balance transfer may come with favorable terms, such as no late fees, lower APR, and no specific payment dues – as long as you choose a profitable option.
Why It's a Good Option
One of the best reasons why borrowers opt for a balance transfer for their loan is that it lessens your interest rate, and in turn, reduces your overall outstanding balance. We know that the interest rate is a big factor in loans and is affected by the time you take to repay your loan.
Interest rates also vary from lender to lender, and it's always good to compare interest rates for you to secure a better balance transfer offer.
If the interest rate is lower and the fees are partially waived, you might want to take that offer. Extra fees also matter, so reading the fine print of your balance transfer is a crucial point.
The Cons of Balance Transfers
The benefits of balance transfers outweigh the cons, but not all balance transfers are beneficial.
A balance transfer of loans can help you save money and get out of your loan faster by offering a lower interest rate, depending on the bank of your choice.
However, the deal also depends on banks and lenders.
Here are the cons of opting for a balance transfer of loans:
- You can lose your loan transfer's low rate and introductory fees once the promotional period ends. It might still cost less, but the difference won't be significant.
- You might end up paying more for your loan. Balance transfer of a loan is still taking out a new loan. If you haven't weighed your options for balance transfers or done research, you might end up being in more debt.
- Balance transfers need good credit to be approved. Since you're technically getting a new loan from a new lender, you are considered probationary to the lender, so having a good credit score and balance affects your balance transfers' outcomes.
When Should You Opt for a Balance Transfer?
Interest rates are a quantifier for balance transfers, but there are many reasons why a borrower should consider getting one.
- Before or during the first year of your loan tenure, if the interest rates are gainful and you want your loan to finish faster, it's better to secure a balance transfer during the first year. Securing a balance transfer longer may still deal with a decrease in interest rate, but it might not be as economical or gainful.
- Like other bank transactions, balance transfers involve processing fees and other rates to secure your transaction. If the charges and rates are low, consider it an excellent option to save money.
Keep in mind that you may be getting a lower interest fee if you continue, but the charges of the new lender will probably cost you more than you were initially paying. It is better to take into consideration the added charges before deciding.
- Your employment can help. Some lenders offer varying amounts of interest rates to borrowers who work in reputable companies.
- A balance transfer can be a good option if you wish to change your current loan terms. A balance transfer can affect your loan tenure, interest rate, installment rate, top-up loans, and repayment.
When is a Balance Transfer a Bad Idea?
Despite all the benefits of doing a Balance Transfer, there will be circumstances that opting for this option may have negative outcomes.
There are two main reasons why a Balance Transfer may not be for you.
Since a Balance Transfer is still a loan, there’s a probability that you could end up in more debt. Paying off debt takes time and loans have limits.
Another reason why a Balance Transfer could be a disadvantage is when you have a bad credit. A prerequisite of a loan is a good credit.
If you’re trying to get cash for an emergency, or in need to pay off the money you borrow quickly, a short term loan may be a better option for you.
There are many lenders available online who can provide you with this type of loan.
Some lenders, like CreditNinja, are also able to consider applicants who may not have the best credit history, and provide you with funds the day you apply. Because of the short-term nature of these types of loans, a balance transfer loan would be impractical.
The Bottom Line
Balance transfer of loans is a good option that can help you finish your debt faster and with ease. Despite their benefits, many are not familiar with the process of applying for one or the optimum timing for the balance transfer.
Balance transfers are also helpful in keeping up with your loan's requirements by being updated with the new rates other lenders might offer. It's also a chance for you to financially widen your horizons and be open to possibilities and changes it can offer.
Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.