Have you taken a personal loan or home loan at an interest rate which is digging deep in your pocket during repayment? Wouldn’t it be relieving if you could transfer whatever loan balance you have to another bank for a lower interest rate? Yes, you can now switch your existing loan to another bank/lender who is ready to offer you a lower interest rate on your outstanding amount. This is called balance transfer.  

Now, you must be wondering how banks benefit by offering the loan at a lower interest rate. To understand that, you must know how a balance transfer works and how it is beneficial to you and the bank.  

Beside the loan balance transfer, there is also credit card balance transfer, wherein you can move your outstanding balance of existing credit card to another credit card to enjoy relaxed repayment with lower interest rate.  

Understanding Balance Transfer 

One of the primary reasons why banks offer balance transfer is to increase their customer base by attracting them with a lower interest rate. However, you should only consider balance transfer if you would be gaining something from the switch. 

Every loan comes with a lock-in period which can range between 6 months to 1 year. Until completing the lock-in period, you must remain with the same lender. No balance transfer is possible during such times. After you have made up your mind to make the switch, you can look for the banks that provide you with a lower interest rate on your loan. This is just like applying for a new loan all over again, only for a lower interest rate.  

You need to get the outstanding amount from the existing lender for which a Demand Draft or Cheque will be given in favour of your existing loan account. With that, you can prepay the loan to the current lender. There will be prepayment charges associated with the loan. You can also avail more than the outstanding amount from the new lender to manage your prepayment charges and other personal needs as well based on your eligibility. You will now be having a new loan account with the new lender.  

Some lenders also allow you to reduce the number of EMIs with the reduction of interest rate. This can help you repay the loan faster and further reduce the outgo on the interest payment.  

Things to Consider Before Making the Balance Transfer 

Before approaching a bank to transfer your existing high cost debt, do a check on the following items to find the gains out of the transfer.  

Calculate the Gains 

The EMI is structured in such a way that initially a major portion of the outgo is fixed for interest rate and only a smaller part is deducted from the principle amount. Hence, when you complete your lock-in period you would have paid so much interest than principle amount. Moreover, there will be prepayment charges from the current lender and processing fees from the new lender. Some lenders charge foreclosure charges as high as 6% of the outstanding loan amount, which itself will cost you considerably if the loan amount is higher. Calculate how much you can save by making the balance transfer.  

A balance transfer is very useful when you want to get top up loans at low interest rate or reduce and increase the loan tenure.  

Terms and Conditions 

Before acknowledging the new loan, read the fine print of the terms and conditions. There are instances where the new lender might try to sell you lifetime free credit cards or insurance schemes that may not be any use to you, ask you to open a savings account, etc. The perks may not be relevant sometimes and might push you into further debt burden. Be cautious about such things before you sign up the deal.  


If you are nearing the end of your tenure of the existing loan, a balance transfer would be of no use as you would have paid a hefty sum on the interest outgo already.  A balance transfer is useful only when you make the move at the beginning of the tenure right after the lock-in period.  

We understand that a loan with a higher interest rate will affect your monthly expenses heavily. A switch could offer you a prospective solution to the existing problem. However, we strongly recommend you calculate the benefits that you get out of it.  

Credit Card Balance Transfer 

Just like how you transfer the outstanding balance on your loan account to another bank, you can also transfer your outstanding debt to another credit card company for a lower interest rate or sometimes at 0% interest rate. This seems an attractive option for credit cardholders who are unable to pay off their credit card debts. Meanwhile, this becomes an opportunity for the credit card companies to increase their customer base.  

How does credit card balance transfer work? 

When you have maxed out your credit card limit or unable to convert your outstanding debt to EMIs, you can just transfer the balance to another credit card to enjoy a break from paying high interest rate for a certain period which can range from 6 to 12 months.  

Every credit card company charges Annual Percentage Rate on your credit card which could be as high as 17%. So, you can approach another credit card issuer who would be willing to offer you the balance transfer at low APR or even 0% interest rate. However, this offer might remain only for a certain period and after which the standard APR will be applicable. For making the balance transfer, there may be processing charges from both the card issuers.  

While picking the balance transfer card, empower yourself with information whether it fits all your needs. To do the transfer, you need to contact the new credit card company and tell them about your card details and outstanding amount. Based on your eligibility, the balance transfer will be done, and you may or may not be eligible for the entire balance to be transferred. 

You must remember that a credit card balance transfer simply means that you just get the benefit of break from paying the existing credit card debt. However, you are liable to pay off the entire debt at your own convenience to the new lender.