Is a Car Loan Balance Transfer Worth It? Benefits, Charges & Things to Consider

If you take out a loan to buy a car, it may run for several years. Over time, your financial situation and the interest rates offered by different lenders can change. You may find that another lender is offering a lower interest rate than the one on your existing car loan. In that case, you may consider a car loan balance transfer.

Is a car loan balance transfer worth it? In this guide, we will help you understand what it is, its benefits and everything else you need to know. 

What is Car Loan Balance Transfer?

A car loan balance transfer is the process of transferring the outstanding balance of an existing car loan from one lender to another. The new lender pays off the outstanding loan amount to your existing lender. Then you will have to repay the new lender according to the revised loan terms. If you opt for a loan balance transfer, you should compare the total savings instead of only looking at the new EMI.

However, a lower EMI does not always mean that your new loan will be cheaper. If the new lender extends your repayment tenure significantly, you could end up paying more interest over the life of the loan.

Benefits of Car Loan Balance Transfer

Balance transfer of car loan can be useful when the new loan terms are much better than your existing arrangement. Some of its key benefits include:

1. Lower Interest Rate

The biggest reason borrowers consider refinancing car loan arrangements is the chance to secure a lower interest rate. Even a small reduction in the interest rate can make a difference when the outstanding principal is high and several years of repayment remain.

2. Lower EMIs

A lower interest rate can result in a lower EMI. However, this is only applicable only if the remaining tenure remains the same. Alternatively, you may choose to maintain the same EMI and shorten the repayment period. This can help you repay the loan faster and reduce the total interest paid.

3. Reduced Overall Interest 

The most important benefit of a car loan BT is potentially reducing the total interest payable over the remaining tenure. If your current lender charges a considerably higher rate than another lender, transferring the loan could save a meaningful amount in interest. However, calculate the savings after deducting all applicable charges. 

4. Repayment Flexibility

A new lender may offer repayment terms that are more suitable for your current financial circumstances. This can be useful if your income or expenses have changed since you originally took the car loan. However, consider extending the tenure carefully, as it can increase the overall interest paid.

5. Car Loan Balance Transfer and Top Up

Some lenders may allow borrowers to combine a balance transfer with a top-up loan. Under this type of arrangement, the new lender transfers the outstanding car loan as well as provides additional funds to you.

6. Obtaining Better Loan Terms

Your credit profile may have improved since you first took the car loan. If your credit score, income or repayment history have strengthened, you may qualify for better loan terms. A balance transfer can give you an opportunity to renegotiate the cost of your loan.

Charges & Fees of Balance Transfer for Car Loan

While considering a balance transfer for car loan, do not focus only on the new interest rate. The transfer involves several potential costs. Generally, the fees and charges include:

Are There Any Hidden Charges?

There should not be surprises if you carefully review the loan agreement and fee schedule. However, borrowers sometimes overlook smaller costs because they focus primarily on the interest rate.

Before transferring your loan, ask the new lender for a written breakup of all applicable charges and ask the existing lender for a final foreclosure statement.

Your calculation should be:

• Net savings = Interest saved − Transfer-related charges

If the net savings are small, the balance transfer for car loan may not be worth the effort and potential risks.

Interest Rate Comparison Car Loan Transfer

The new interest rate is one of the most important car loan transfer charges. Let us take a look at the rates offered by some of the top lenders:

1. Illustrative Example

The car loan balance transfer interest rate should be compared with your existing rate based on the remaining principal and tenure.

Consider the following example. Suppose you have:

• Outstanding loan: ₹5,00,000
• Remaining tenure: 36 months
• Existing interest rate: 12%
• New interest rate: 9.5%

An approximate EMI comparison could look like this:

Disclaimer: Actual EMI and total repayment may vary depending on the lender's calculation method, applicable fees, dates and loan terms.

In this example, the borrower could save approximately ₹21,000 in future interest before considering transfer-related charges.

Now suppose the total cost of transferring the loan is ₹15,000. This includes processing fees and other applicable costs. 

The approximate net benefit would be:

₹21,000 − ₹15,000 = ₹6,000

That is a relatively small saving.

On the other hand, if the total transfer costs were only ₹5,000, the net saving would be approximately ₹16,000, making the transfer more attractive.

This demonstrates why simply finding a lower rate is not enough.

2. How to Calculate Your Potential Savings

Before applying for a car loan balance transfer, follow these steps:

• Step 1: Find your outstanding principal by checking your latest loan statement.
• Step 2: Find the remaining tenure and how many EMIs are left.
• Step 3: Calculate the remaining interest. You will need to find out how much you would pay if you continued with the existing lender.
• Step 4: Get the new lender's offer. Compare the proposed interest rate, tenure and EMI.
• Step 5: Calculate the new total repayment costs. Include the interest payable under the new loan.
• Step 6: Add all transfer costs. This includes processing fees, foreclosure charges and other applicable costs.
• Step 7: Compare the final numbers. If the savings after all costs are substantial, the transfer may be a good decision.

When Should You Consider a Car Loan Balance Transfer?

A car loan balance transfer may be worth considering in the following situations:

• High Existing Interest Rate: If your current interest rate is significantly higher than the rates you can qualify for today, refinancing may reduce your future interest burden.
• Large Principal Outstanding: If you have a greater outstanding principal, you can benefit from a lower interest rate.
• Several Remaining EMIs: A transfer is generally more useful when a meaningful portion of your previous loan tenure is remaining. 
• Improved Credit Profile: If you have improved your repayment history and your overall financial profile has improved recently, you may qualify for more competitive terms for the balance transfer.
• Lower EMI Options: If you want to improve your monthly cash flow, a transfer could be beneficial if the new lender offers a lower rate or more suitable tenure.

Car loan balance transfer offers can vary significantly between lenders. Compare the complete offer rather than choosing one based only on promotional rates.

When Should You Avoid a Balance Transfer Car Loan?

A car loan balance transfer may not always be the right decision for you. Let us understand when you should avoid it:

• Existing Loan is Almost Over: If only a few EMIs remain, there may be little interest left to save. Transfer costs could easily outweigh the potential benefits.
• Interest Rate Difference is Very Small: A minor reduction in the interest rate may not justify the paperwork and associated fees.
• High Foreclosure Charges: If your existing lender charges a substantial foreclosure fee, you may not be able to gather any savings from the new loan.
• Longer New Tenure: Sometimes, you can get a lower EMI by extending the repayment period. While this may improve monthly cash flow, it can increase your total interest cost.
• Weaker Credit Profile: If your credit profile has deteriorated since taking the original loan, you may not qualify for the attractive advertised rates. Generally, lenders offer car loan transfer charges based on your individual eligibility.
• Insignificant Net Savings: If the transfer saves only a small amount after all charges, keeping your existing loan may be simpler.

Conclusion

A car loan balance transfer can be a useful way to reduce borrowing costs. But it is not automatically a better option than staying with your existing lender. The decision should be based on the amount of money you will be able to potentially save.

If you are considering a balance transfer, you can compare your options on My Mudra. Our platform will help you look into the car loan balance transfer interest rate offered by the top lenders in India, in one place. You should also calculate the numbers first using our free car loan EMI calculator. For more guidance with your loan process, you can request assistance from our dedicated financial advisors, completely free of charge.