When should one transfer a personal loan to a lender offering lower interest rate?

On the surface, the idea of transferring your personal loan to a lender offering a lower interest rate sounds like a smart financial move. However, like most things in finance, the real answer lies in the details. Let’s break it down so you can make an informed decision:

Timing Matters: Where Are You in Your Loan Cycle?

You’ve been repaying your personal loan for eight months. In most loans, especially personal loans, the initial EMIs go more toward interest than principal. That means you’re still in the early, interest-heavy stage — which makes this a potentially favorable time to consider a balance transfer.

However, timing is just one part of the puzzle.

Foreclosure Charges: The Hidden Cost

Most lenders impose a foreclosure or prepayment penalty, often ranging between 2% to 5% of the remaining loan amount. If you’re transferring too early, this penalty might offset any benefit you would get from the lower interest rate. Always check this clause in your current loan agreement.

Don’t Fall for the Rate Alone

Lenders promoting balance transfers often highlight attractive interest rates. But dig deeper. Ask about:

• Processing fees
• GST
• Administrative or legal/documentation charges

These one-time costs can sometimes reduce your actual savings to almost nothing, even if the rate looks good on paper.

Calculate Net Savings, Not Just the Rate Difference

We recommend that customers assess the net savings — i.e., total cost saved after accounting for all switching-related charges. We’ve seen borrowers save ₹30,000– ₹50,000 through smart transfers. But we’ve also encountered cases where the actual saving was less than ₹1,000, making the switch pointless.

When is a balance transfer worth it?

Here’s a simple checklist to guide your decision:

• You have at least 12–18 EMIs left to repay
• You’re getting an interest rate that’s 2% or more lower than your current rate
• The total cost of switching is less than 1.5% of your outstanding loan amount

If you meet all three conditions, the transfer is likely to work in your favour. If not, it may be wise to wait a little longer or explore other ways to reduce your loan burden, such as partial prepayment or restructuring. Always remember: low rates catch the eye, but smart analysis saves real money.

Chintan Panchmatiya is founder, SwitchMyLoan