Moving a loan balance to a lower rate

The banner rate versus the spreadsheet

A friend of mine moved a credit card balance for a lower rate. The card advertised a low introductory rate and she paid a fee on day one. The offer lasted eight months. She cleared most of the balance in six. The interest she saved was smaller than the fee she paid at the start.

The transfer looked cheap on the banner and lost money on the spreadsheet.

This happens often because the banner shows one number, the rate, and hides the others. The fee, the length of the offer, the rate after the offer, and what you do with the balance are all outside the headline. A fair comparison needs all of them in one place.

The same idea applies to every type of balance move:

• A credit card balance moved to a card with a promotional rate.
• A personal loan moved to a new lender at a lower rate.
• A home loan moved to a lender who offers a cut.
• Several debts rolled into one loan.

In each case the question is the same. After every cost, how much cash do you keep, and for how long?

The balance transfer calculator puts the old loan and the new offer side by side. The guide on what a balance transfer saves explains each input in plain words. This article gives you the thinking that sits around both.

Every cost of moving, listed

Before any sum, write down the real price of the move. People often count one or two items and miss the rest.

1. Processing fee on the new loan. Often 0.25% to 1% for a home loan and 1% to 3% for a personal loan. Some lenders waive it for a short time.
2. Balance transfer fee on a card. Usually 1% to 5% of the amount moved, charged once at the start. Some cards charge a minimum amount.
3. Prepayment or foreclosure charge on the old loan. Rules vary by country, product and rate type. Floating-rate home loans to individuals often have no such charge in some places, while fixed-rate and business loans commonly do. Check the loan agreement.
4. Legal, valuation and documentation fees. These apply mainly to secured loans such as a mortgage.
5. Stamp duty or registration costs. Some regions charge them again when the lender changes. Ask before you start.
6. Taxes on fees. In many countries, a sales tax or GST applies to processing fees.
7. Insurance bundled with the new loan. A life or credit insurance premium added to the offer is a real cost if you did not choose it.
8. Rate after the introductory period. The cost that arrives in month nine, when the low rate ends.
9. A gap with no payment protection. If the old loan closes before the new loan opens, check that interest does not run twice for a few days.
10. Credit score impact. A new application leads to a hard enquiry. One enquiry is small. Several in a short time can lower a score a little.

A good habit is to ask for a written sheet with every charge from the new lender, and the exact foreclosure figure from the old one. If a lender will not write it down, treat that as a warning.

How to find the break-even point

Break-even is the number of months it takes for the saving to repay the cost of moving. After that point, each month is a real gain.

Break-even months = total cost of moving ÷ monthly saving

The monthly saving needs care. For a fixed-tenure loan, the cleanest figure is the drop in EMI. For a rough check, use this shortcut:

Monthly interest saved ≈ outstanding balance × (old rate − new rate) ÷ 12

Here is the shortcut on a small loan. You owe ₹1,50,000. The old rate is 14%. The new rate is 11%. The fee is 1.5%, which is ₹2,250.

• Monthly interest saved ≈ ₹1,50,000 × 0.03 ÷ 12 = about ₹375.
• Break-even ≈ ₹2,250 ÷ ₹375 = 6 months.

The shortcut is slightly generous, because the balance falls over time and so does the saving. For the exact number, enter the loans into the calculator.

Now look at what the break-even tells you.

• If you expect to keep the loan for much longer than break-even, the move is likely worth it.
• If you will repay, sell or refinance soon after break-even, the gain is small.
• If break-even is longer than the time you will hold the debt, do not move.

That last rule explains the story at the top. The break-even on her card was longer than the months she carried the balance.

The promotional rate trap

Many card offers use a low rate for a short time, then switch to a high one. A 0% offer for eight months looks fine. A rate of 36% afterwards is the real price of anything left unpaid.

Four questions to ask about any promotional rate:

1. How long does it last? Count in months and note the exact end date.
2. What does the rate become? Ask for the standard rate, and whether it applies only to the transferred amount or to new purchases too.
3. What counts as a late payment? Some offers end the promotional rate if you miss a single payment.
4. How do payments get applied? In some products, payments go first to the lower-rate balance, which leaves the higher-rate balance growing.

Then answer the one that matters most: can you clear the balance before the offer ends?

Take a ₹50,000 card balance at 3% a month. You can pay ₹6,000 a month. Compare two paths over eight months.

• No transfer. After eight payments of ₹6,000 the balance is still about ₹9,990.
• Transfer at 0% with a 4% fee (₹2,000). After eight months the balance is ₹2,000, and you also paid the ₹2,000 fee. That is about ₹4,000 in total against about ₹9,990 left without the transfer. You save about ₹6,000.

Now change one input. You clear the same ₹50,000 in just three months by paying about ₹16,700 a month. The interest you would have paid is only about ₹3,100. The fee is ₹2,000. The saving drops to about ₹1,100. If the fee were 5%, almost nothing remains.

The lesson is simple. A promotional offer is most useful for large balances that you need many months to clear. It is least useful for balances you will pay off fast.

Do not reset the clock by accident

The most common surprise in a loan transfer is the tenure. A new loan often starts a fresh term. If you had 8 years left and the new loan runs for 10, the EMI drops, but the total interest can rise even at a lower rate.

Check this with a simple comparison. Keep the remaining tenure the same, and compare three paths:

• Stay put. Old rate, old EMI, old end date.
• Move and keep the tenure. New rate, lower EMI, same end date. The saving is clean and easy to measure.
• Move and keep the EMI. New rate, same EMI, earlier end date. You finish sooner and pay less interest.

Take the home loan from the quick answer: ₹30,00,000 at 9.5% with 18 years (216 months) left, moving to 8.5%.

• Stay put: EMI about ₹29,040.
• Move and keep tenure: EMI about ₹27,160. Saving about ₹1,870 a month.
• Move and keep the old EMI: at 8.5% a payment of ₹29,040 clears the loan in about 186 months, which is 30 months earlier.

Both options use the lower rate. The second protects the monthly budget. The third finishes sooner. If you can afford the old EMI, keeping it is often the stronger choice, because every extra rupee goes to principal.

Use the EMI calculator to check the payment and the end date of each path before you commit.

Compare offers on the same footing

When two lenders both offer a transfer, it is tempting to pick the lower rate. A lower rate with a higher fee can lose to a slightly higher rate with no fee. The only fair method is to compare total cost over the same period.

The compare loan calculator puts two offers side by side. Fill the same loan amount and the same tenure in both columns, and add each fee. Then read three numbers:

• The EMI of each offer.
• The total interest of each offer.
• The total cost, which is total interest plus fees.

Pick the lower total cost, unless the EMI of that option is too high for your budget. Next, test the answer at the horizon you expect. If you may sell the property in five years, compare costs at five years, not at twenty.

Also ask each lender these four questions:

1. Is the rate fixed or floating, and what is the reset rule?
2. Are there prepayment charges, and for how long?
3. Is there a lock-in period?
4. Does the quoted rate apply to my profile, or is it a best-case rate?

An advertised "starting from" rate usually applies to the strongest applicants. Your offer may be higher, and the offer is the only rate that counts.

When a transfer makes sense, and when it does not

A transfer is more likely to help when most of these are true:

• The rate gap is clear, such as 1 percentage point or more on a large home loan, or several points on a card or personal loan.
• A long time remains on the loan, so the saving has room to build.
• The total fee is small compared with a year of savings.
• You can keep the old EMI or keep the same end date.
• You do not plan to sell or repay within the break-even period.
• Your old loan has no heavy prepayment charge.

A transfer is more likely to hurt when:

• The loan is nearly finished. Most of each payment is already principal, so the saving is small.
• The promotional rate expires before you can repay the balance.
• The fees and legal costs rival a year of interest saving.
• The move extends the tenure and raises total interest.
• You may use the freed card limit for new spending, so the debt grows back.
• A call to your existing lender could get a rate cut at no cost.

That last point is worth stating again. Before you move, ask your current lender for a rate review. Many will match a competitor's rate to keep the loan, and you save every fee on this page.

Debt moves are not debt fixes

A lower rate does not clear a debt. It only makes each month cheaper. The balance stays the same until you pay it down.

If a card balance moves to a new card, the old card now has a free limit. The temptation is to use it. A year later you have the transferred balance and a new balance on the old card, and you are worse off than when you started.

Some habits help:

• Close or freeze the old card if you tend to overspend on it, or lower its limit.
• Set a fixed monthly payment on the new debt, higher than the minimum, so the balance falls on a schedule.
• Track spending for three months so you can see the habit that built the balance. The expense tracker is built for this.
• Choose a payoff order if you hold several debts. The debt payoff planner shows how the avalanche method (highest rate first) and the snowball method (smallest balance first) change the date you finish.

If you want to read more on the two methods, the article on debt avalanche versus snowball compares them with numbers. The article on how long credit card debt takes to pay off shows how small payments stretch a balance over years.

A step-by-step process before you move any balance

1. Get the exact outstanding balance and the foreclosure figure from the old lender in writing.
2. Get the old rate, the remaining months and the current EMI.
3. Ask your current lender to match the new rate. It costs nothing to ask.
4. Collect written offers from two or three new lenders, including every fee and the rate after any introductory period.
5. Run each offer in the balance transfer calculator with the same balance and horizon.
6. Decide on the tenure. Keep the old end date or the old EMI so the move is a true saving.
7. Compute the break-even in months and compare it with how long you plan to hold the loan.
8. Check the fine print: lock-in, prepayment, rate reset and insurance add-ons.
9. Start the transfer only after the new loan is sanctioned, and confirm the old loan is closed and the no-dues letter is issued.
10. Set a calendar reminder for the end of any promotional period and for the first anniversary, to review the rate again.

Worked example from start to finish

Anita has a credit card balance of ₹3,00,000 at 36% a year, which is 3% a month. She pays ₹15,000 a month. A bank offers a personal loan at 14% for her, with a 2% processing fee, to clear the card.

Frequently asked questions