How does loan and credit card balance transfer work?

How does loan and credit card balance transfer work?

Summary

Loan and Credit Card balance transfer is an option that helps you get financial relief. When a person transfers his existing loan or credit card dues to another bank or financial institution to get a lower interest rate, better EMI, or convenient terms, it is called a balance transfer.

Through loan balance transfer, you can reduce your EMI, save on total interest and improve payment terms. On the other hand, in credit card balance transfer, you can transfer the outstanding amount from one card to another and avail 0% or lower interest rate for a few months. This makes it easier to repay the dues and there is no burden of additional interest.

Although a balance transfer is a useful option, it is important to keep many things in mind while doing it – like processing fees, transfer charges, new interest rate, loan tenure, and impact on credit score. If all this is to your benefit, then only transferring will be a wise step.

 

Introduction

In today’s fast-paced life, people often take loans for various reasons – such as buying a house, buying a car, paying for education or medical emergency. Similarly, the use of credit cards has also become quite common. But many times it happens that there is more than one loan or if the credit card bill is not paid on time, heavy interest starts being charged on it. At such times, there is an easy and sensible option – Balance Transfer.

Now the question arises, what is Balance Transfer? In simple words, when you transfer the outstanding amount of a loan or credit card taken from one bank or institution to another bank or institution – so that you can get a lower interest rate or better payment terms – then it is called a Balance Transfer.

Suppose you had taken a personal loan from a bank on which 14% interest is being charged, but now another bank is offering to transfer the same outstanding loan at an interest rate of 10%. If you accept this offer, then your old loan will be repaid by the new bank and now you will pay the EMI of the same loan with a lower interest rate to the new bank. This process is called a loan balance transfer.

In this article, we will learn in detail how the balance of loan and credit card is transferred, in which circumstances it proves beneficial, what are its advantages and disadvantages, and what things are important to keep in mind. If you are also troubled by the burden of your loan or credit card, then this information can be very useful for you. Let us now further understand this process in simple language.

 

What is a Loan?

A loan is money that a bank, financial institution, or person lends you for some time. This money has to be returned within a fixed time, along with interest. When we do not have money immediately to fulfill a need, such as buying a house, studying, buying a car, or starting a business, then we take out a loan.

There are many types of loans, like Homloansan, Personloansoan, Educatloans Loans, Vehicle loans, etc. But keep in mind – a loan is a responsibility. It is very important to repay it on time; otherwise, your CIBIL Score, i.e., credit history, may be spoiled in the future.

What is a Credit Card?

A credit card is a plastic or metal card that a bank or financial institution gives to its customers. With its help, you can buy any goods or services without paying money immediately. In simple words, it is a kind of “card to spend on credit”.

When you purchase with a credit card, the bank makes the payment for you at that time, and later, you pay that amount back to the bank. The bank gives you a limit, which is called a credit limit. You can spend within this limit. Every month, when you get a bill, Hatch tells you how much you spent and how much is left to pay.

 

What is a Balance Transfer?

Balance Transfer is a financial facility in which you can transfer the outstanding amount of your old loan or credit card to another bank or financial institution. Its purpose is to get a lower interest rate and make the EMI a little cheaper.

For example, if you have taken a personal loan from a bank and the interest on it is very high, then you can transfer the same loan to another bank which is offering a lower interest rate. This reduces your monthly installment (EMI) and gives you some relief.

Similarly, if your credit card bill has increased and you are finding it difficult to pay it, then you can transfer that outstanding amount to the credit card of another bank. Many banks offer balance transfer facilities at 0% interest or very low interest in the beginning.

Overall, balance transfer proves to be a wise move, so that you can manage your old loan on new and better terms. But before doing this, it is important to understand all the terms and conditions thoroughly.

 

How does loan and credit card balance transfer work?

 

How does loan balance transfer work?

Suppose you had taken a personal loan at a 14% interest rate, but now another bank is offering the same loan to you at a 10% interest. In such a case, you:

• Request a balance transfer from the new bank.

• The new bank pays the entire outstanding amount of your old loan.

• Now you pay the loan EMI to the new bank instead of the old bank – but at a lower interest rate.

• For this, you have to provide some important documents – like old loan statement, identity card, income proof etc.

• This reduces the EMI, and you can save a lot on interest.

How does a credit card balance transfer work?

If you have a high balance on one of your credit cards and heavy interest is being charged on it every month, then you can:

• Transfer that outstanding amount to a credit card of another bank.

• The new bank usually offers 0% or very low interest rates for the initial months (e.g., 3-6 months).

• During this period, you can repay your amount without paying any additional interest.

• This is especially beneficial if you can repay the entire balance in just a few months.

 

Things to consider while transferring balance:

• What is the transfer fee or processing charge?

• What will be the new interest rate and loan tenure?

• Are there any hidden charges?

• Will your credit score be impacted?

 

What is a Loan Settlement?

Loan Settlement is a process in which you negotiate with your creditor to forgive a part of the outstanding amount on your Loan by making a lump sum payment. It is an agreement that you make with your card issuer as a last resort when you see that your Loan debt is increasing.

This can happen due to many reasons, ranging from unnecessary spending to careless spending habits. When your debt increases, the interest on it also increases, which can make it difficult for you to repay the outstanding amount. If you do not see any way out of this, then you can recommend a Loan Settlement.

 

What are the reasons for doing a Loan Settlement?

Below are some common reasons:

• If a person loses his job, stops a source of income, or suffers huge losses in business, then it may be difficult to repay the loan on time.

• There may be a shortage of money to repay the loan if the expenses suddenly increase due to a major illness or medical emergency.

• Many times, a person has the burden of more than one loan, which becomes difficult to repay on time.

• There may be problems in repaying the loan due to any natural disaster, accident, or any major crisis in the family.

• If the interest rate of the loan is very high and there is a problem in repaying the installment, then a Loan Settlement is resorted to.

• Many times, a person is not able to manage his expenses and income properly after taking a loan, which causes problems in repaying.

 

What documents are required to do a Loan Settlement?

Let us know what documents are require for a Loan Settlement.

1. ID Proof

• Aadhar Card
• PAN Card
• Passport
• Driving License
• Voter ID

2. Address Proof

• Aadhar Card (if it has the correct address)
• Electricity or Water Bill
• Copy of Bank Passbook or Bank Statement
• Rent Agreement (if you live on rent)

3. Income Proof (if required)

• Salary Slip (if you are employ)
• Bank Statement (last 6 months)
• Copy of Income Tax Return (ITR)
• Business Documents (if you are a businessman)

4. Loan Statement

You will have to provide the Loan statement to give the correct information about your outstanding balance. The bank can also generate this statement itself, but sometimes they ask you for a copy of it.

5. Settlement Request Letter

If you are approaching the bank for settlement on your own, you will have to give a written Settlement Request Letter in which you can explain:

• Why do you want a settlement?
• What is your financial situation?
• How much can you pay as a one-time payment?

6. Settlement Offer Letter given by the bank

When the bank agrees to the settlement, they give you a Settlement Offer Letter. Read it carefully and confirm the amount and terms mentioned in it.

 

What to do before doing a Loan Settlement?

Below are some steps that should be followed before a Loan Settlement:

• First of all, check your income, expenses, and all other debts properly. Know how much you can repay.

• Before a Loan Settlement, share your problem with the bank or lender. 

• Sometimes, they can offer you a better solution, such as reducing the EMI or increasing the loan term.

• Contact a financial advisor or expert. They can help you make the right decision and explain how a Loan Settlement will affect your credit score.

• If you decide to do a Loan Settlement, read the terms and conditions given by the bank carefully. Make sure that you are not being charge any hide fees.

• Doing a Loan Settlement can reduce your credit score. This can make it difficult to get a loan in the future. Make a decision keeping this in mind.

• Loan Settlement should be the last option. Before that, consider other options like refinancing, reducing EMIs, or asking family and friends for help.

 

How to apply for Loan Settlement?

If you are unable to pay your Loan dues and are troubled by heavy interest rates, a Loan Settlement can be a possible solution. Under this process, the bank or Loan company can waive off part of your total outstanding amount and give you the option to make a lump sum payment (One-time Settlement). However, this can affect your CIBIL score, so adopt it only as a last option.

 

Step-by-step process to apply for Loan Settlement

• First of all, decide that you are not in a position to pay the entire Loan dues.

• Check your income and expenses and decide how much you can pay at the most.

• Talk to the customer care of your bank or Loan company and tell them about your current financial situation.

• Ask for a settlement offer from the bank and start the conversation.

• The bank will propose a settlement amount, which will be lower than your outstanding amount.

• If you don’t accept this amount, negotiate with the bank and attempt to lower the amount based on your capacity to pay.

• After the bank and you reach an agreement on a specific amount, ensure that you receive a written settlement letter.

• It should explicitly state the settlement terms, payment dates, and other conditions.

• After completing the settlement, pay the amount in full within the given time.

• Get a No Due Certificate (NOC) or Final Settlement Letter from the bank after the payment.

• After the settlement, make sure the bank updates the “Settled” status in your CIBIL report.

• This can affect your credit score, so inculcate good financial management habits to improve it in the future.

 

What is the impact on the CIBIL score after a Loan Settlement?

A settlement can hurt your credit score. The impact can be seen in the following ways:

• After the settlement process, your credit report records that you have “settled” your debt. This entry remains in your credit history for 7 years and can be viewed negatively by lenders or other creditors, which can affect your chances of getting a loan in the future.

• Since a settlement means that you have not repaid the entire debt, when you try to get a new loan in the future, banks may reject your application or offer you loans at higher interest rates by looking at your credit score and report.

• After settlement, if you have a Loan or other credit line, your credit limit may be reduced as creditors think you may be a high-risk customer.

• If your credit score drops, it may be difficult for you to get a loan, Loan, or any other type of credit facility. This can also affect your financial stability, especially if you face a financial emergency in the future.

• When you settle with your bank, you are not paying off the entire debt, but a certain amount that is less than the principal amount. This is viewed negatively by the credit bureaus, as it shows that you have been unable to repay your debt. As a result, your credit score may drop.

 

What are the advantages (Pros) of doing a Loan Settlement?

Let us know what the benefits of doing a Loan Settlement are:

• If your Loan dues have become very high, and you are unable to repay them, then a settlement can give you great relief.

• When you do not pay your Loan continuously, the bank can send a legal notice to you and can also send a recovery agent.

• The interest on Loans is very high, which can be up to 30-45% per annum. If you are not paying on time, the interest and late payment fees keep increasing continuously.

• While settlement will bring down your CIBIL score, provided you exercise financial responsibility after settlement and settle your other loans and bills punctually, you will improve your score over time.

• In a Loan Settlement, you pay a specific sum at one time, which settles your debt entirely. It may be helpful to the persons who desire to come out of debt by increasing a little money at a time.

• Mental tension grows through rising debt and bank calls. On settlement, you are free from this concern, and you may concentrate on better financial status again.

 

What are the disadvantages (Cons) of doing a Loan Settlement?

Let us know in detail what the disadvantages of doing a Loan Settlement are.

• The biggest disadvantage of a Loan Settlement is that it spoils your CIBIL score. When you settle with the bank and pay a lesser amount instead of paying the entire dues, the bank reports it in “Settled” status. This status can remain in your credit report for up to 7 years, which may make it difficult to get a loan or a new Loan in the future.

• If you have done a Loan Settlement once, banks and other financial institutions may consider you a “high-risk customer”. This may cause problems in getting a home loan, personal loan, or business loan, or the bank may give you a loan at a higher interest rate.

• In some cases, when you go to take a loan from another bank in the future, the bank may ask you to repay the entire previous settlement amount after looking at your credit history. That is, if you had settled by paying Rs 50,000 on an outstanding amount of Rs 1 lakh, then the new bank can demand the remaining Rs 50,000 from you.

• If you have settled a Loan with a bank, then the same bank can refuse to issue you a Loan again in the future.

• Doing a Loan Settlement can spoil your relationship with the bank. The bank sees it as if you have not fulfilled your financial responsibilities completely, due to which you may face problems in banking services in the future.

 

Conclusion

Balance transfer of loan and credit card is a very good financial facility, which is especially helpful when you are troubled by the high interest rates of your old loan or credit card. In today’s time where everyone is conscious about their EMI and expenses, balance transfer provides a way through which you can reduce your monthly installments and also save a lot on the total interest amount.

If this decision is take at the right time and thoughtfully, then it can improve your financial condition to a great extent. For example, suppose you have a loan of ₹ 5 lakh, and you are paying interest at the rate of 14%. Now, if another bank offers the same loan at 10% interest, then transferring there will also give you relief in EMI and you can save thousands of rupees in the entire loan period.

The same thing applies to credit card balance transfer. If your card bill has become very high and you are tired of paying huge interest every month, then it may be better to transfer the balance to a bank that is offering 0% interest payment facility for the first few months. This gives you time to repay the outstanding amount and you are not burdened with additional interest.

 

Frequently Asked Questions (FAQ’s)

 

Que: How long does the balance transfer process take?

Ans: The process is usually completed between 5 to 15 days, but the time may vary slightly depending on the bank’s process and the status of the documents.

Que: Can I transfer the balance more than once?

Ans: Yes, you can, but you should understand the terms, charges, and benefits thoroughly before transferring each time.

Que: On which loan types can balance transfer be done?

Ans: Balance transfers can usually be done on personal loans, home loans, auto loans, and credit card dues.

Que: Wheis ais balance transfer not beneficial?

Ans: If the new bank charges more, the transfer fee is too high, or there is very little difference in the interest rate, then a balance transfer is not beneficial.

Que: Will I be treated like a new loan by transferring the balance?

Ans: Yes, the new bank treats you as a new customer and offers you a loan only after checking your eligibility, credit score, etc.

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