When you have a current loan, you are in most cases attached to it for a long period. All this time you pay the interest properly and you pay off a certain amount every month. But it may also be that in all those years a better option comes on the market: a loan with a lower interest rate or a lower monthly payment. In that case, you can have the current loan transferred.
What is a loan transfer?
Rates may change during the term of your loan. When interest rates rise, it is possible to transfer your loan to another lender. This can be advantageous if the interest or costs at this provider are lower. From the moment you transfer the loan, you therefore enter into a contract with another lender and other conditions are active.
How does it work? You can continue to compare other lenders during your current loan. If you come across a loan that is cheaper or more attractive than your current loan, it is possible to request a quote. You return the signed agreement of the lender on which your choice ultimately falls. Many lenders will pay off your existing loan and refund the amount that may remain. If this does not happen, you will receive the full amount deposited into your account so that you can pay off your existing loan yourself.
Which loan to transfer?
It is possible to transfer any current loan form. Revolving credit, personal loan, an outstanding debt on a credit card or overdraft on your checking account: everything can be switched to a cheaper loan. Yet this is not free with every form. Do you want to transfer a revolving credit, credit card or overdraft? Then you do not pay any extra costs. This is completely free and can be done at any time. However, transferring a personal loan is not always free of charge.
Transfer personal loan
Whether costs are charged for transferring a personal loan depends on the lender. Any costs that the provider would charge when transferring your existing loan are noted in your loan agreement. Most lenders also report in advance whether the transfer involves costs.
If a provider chooses to charge costs for transferring a loan, then there is a maximum penalty paid. It is therefore good to know that the fine may not exceed 1% of the amount to be repaid. Example: if you still have to repay USD 10,000 and you decide to transfer your personal loan to another provider, your current lender can charge a maximum of USD 100 as a penalty. You can simply earn back these costs by refinancing the loan within a few months, because by refinancing you are stuck at a lower interest rate and therefore have to repay less monthly.
A lender does not have to accept every request for a loan transfer. The new lender will first check whether you are eligible for the new loan. To determine this, they first look at your monthly income and fixed costs. Your marital status, your payment history of your previous credits (Credit Bureau) and your family composition are also studied. However, if you decide not to borrow a larger amount than your current loan, there is a good chance that your application will be accepted. Most providers have roughly the same acceptance criteria.
Transfer multiple loans
In addition to the fact that you can convert a loan to a higher or cheaper loan, it is also possible to transfer multiple loans to one loan. It often happens that someone has several loans and therefore has to pay off several amounts per month. In that case, it can be cheaper and clearer to opt for one umbrella loan.
The idea of such a loan is that you take out one new loan for an amount with which you can immediately pay off all existing loans. Instead of several small loans, with relatively high costs, you now only have one large loan left. In the world of loans, it often applies: the higher the loan, the lower the costs. With one umbrella loan, the costs can therefore be relatively low, when you compare it with the costs of the previous current loans that you had before.
On the one hand, refinancing a loan may lower the monthly costs, but on the other hand, the total costs can be higher. This is because you also enter into a longer term by taking out a new loan. Given this fact, you can say that there is an 'optical' advantage when transferring.
This extension of the term can also be an advantage when it has become a problem to cover the current monthly costs. This advantage only applies that the monthly amount is substantially lower after you have transferred your current loan.
There are several advantages to transferring a loan. In addition to the fact that it becomes a lot clearer, there are other reasons to choose to refinance a loan.
- You only pay one amount per month, this ensures clarity and you know exactly how much you have to pay off per month. You can repay other current loans after refinancing, so that the focus can be placed on that one, new loan.
- You pay less interest. At least, this is the case if you make the right choice during the transfer. The term of the loan plays a major role in this, as does the size of the loan amount.
- In most cases, the switch is arranged by the new lender. This will pay off your current loans with the money you have borrowed. If you still have money left, you will receive it on your checking account. If the lender does not do this, the full amount will be transferred and you can repay the current loans yourself.
- It is often free. Only with a personal loan can a penalty be charged when you transfer the loan to another provider. In all other cases, for example with a current credit or a credit card, this is not the case. This is completely free of charge.
- You will have the opportunity to change providers. You may be less satisfied with your current provider. This can have several causes. Whatever the cause of your dissatisfaction, switching lenders gives you the chance to choose a better provider.
Tips for transferring a loan
Tip 1: Repay continuous credit free of charge
When you transfer a personal loan, in most cases a fine of up to 1% must be paid. This does not apply to a current credit. You can repay this free of charge in one go with the money from the new loan by transferring the loan. This also applies to a credit card debt or when you have an overdraft on your checking account from a bank. A tip is to check in advance whether the new lender does not use a temporary promotional interest. In that case, you are ultimately just as expensive and the transfer only ensures a longer duration.
Tip 2: Cost versus benefit
If you have a current personal loan, you often cannot transfer it without costs. The lender will lose income if you choose another provider during the term. So always check before transferring whether there are any costs involved. If so, ask yourself whether these costs outweigh the benefits of refinancing. If you transfer your loan, you borrow money again to pay off your old loan. This is only advantageous if the interest and conditions are so much better that they outweigh the penalty to be paid.
Tip 3: Short term cheaper than long term
Refinancing a loan can, in addition to a lower interest rate, also ensure a shorter term. With a shorter term, you pay interest over a shorter period. This means that you have repaid the loan faster and you therefore pay less interest, because the amount that needs to be repaid decreases faster. With a longer term, a lower amount is usually charged per month, but in the end you are more expensive because you pay interest for longer and the amount to be repaid decreases less quickly. If you compare these factors, it can therefore be more advantageous to take out a loan with a short term.
Tip 4: Acceptance of the loan amount
The lender assesses your application when you want to refinance a loan. Whether this application is accepted depends on a number of factors. Yet you can influence the approval yourself, for example by borrowing the same amount. If you do not borrow extra money in the new loan, the application is almost always accepted.
Tip 5: Small loan, high interest
Larger loans often seem to cost a lot of money, but appearances are deceptive. Smaller loans often cost a lot more due to the high interest that you have to pay. If you have several small loans, you can save money by merging them. By borrowing one large amount, with which you pay off all small loans, you have lower monthly costs and it is a lot more transparent. It is important to check extra costs. These can be associated with it, especially with a personal loan.
There can also be disadvantages to transferring a loan. For example, a lender may have taken measures in the agreement to prevent such a switch. This is often done by including a so-called penalty clause. This means that you have to pay a penalty interest or a one-off fine upon your departure.
Another method that lenders use is the fixed switching time. If this switching moment has been included in the agreement, then as a borrower you do not have the option to terminate your loan and switch to another provider throughout the year. This is often only possible once a year, on a fixed date. When this is the case, it is extra important to weigh the benefits against what you will have to pay for the transfer.
The interest on your new loan is important, but a disadvantage is that there are often other, unclear costs associated with a loan. These are often stated in the specific conditions of the provider. Are there extra costs associated with the loan, so that the total costs ultimately turn out less often? Or do you have to provide collateral to the lender before you actually qualify for the said low interest rate? Are you even eligible for the low interest rate with which the lender advertises? These kinds of things can form a catch and can, when transferring your loan, turn out as a disadvantage.