February 17, 2018 No Comment. Posted in Financial Literacy

The banking industry is highly competitive in terms of gaining more and more business. The market dynamics and the competition between the industry players have to follow the set rules and bring down the interest rates. It seems like a war between them where they want to attract more new customers with their attractive rates and also retain their existing customers by lowering their interest rates.

Sometimes, if the Bank/ NBFC judges the customer not to be too serious about changing the lender but just want to switch to avail a slight difference from the current rate of interest or any other charges, they may match the same. Being an existing customer the borrower can upfront negotiate this amount. The conversion fees for any type of loan can be mysterious for the borrowers. There might be a situation when the borrower pay a higher conversion fee and still pay a higher EMI than the new borrowers. This can be due to the unavailability of any benchmark for the comparison.

Home Loan Conversion Fee

The loan conversion fee or the switch fee is charged by the Bank/ NBFC to reduce the EMI burden by reducing the interest rates. The charges are between 0.25% – 0.5% plus taxes on the outstanding amount. In special cases where the loan amount is partially disbursed than the switch fee is charged on the undisbursed amount + the outstanding loan amount. This might turn out to be a nightmare for the borrower and not a suitable choice. The lenders charge the switch fee or do not reduce the interest rates themselves due to the following reasons:

  • It’s an important source of income for them
  • Loan conversion charges allow the Bank to pass the benefit of lower interest rates to a limited number of customers. The profitability gets a deep impact if the rate of interests is reduced automatically for all the existing customers. In other words, the Banks/ NBFC’s create an entry barrier to avoid the entry for all the customers.

Sometimes the borrowers do not calculate the savings on the interest rates. Hence, it is important to compare the interest rates and the conversion fee offered. The borrower might have to pay an extra amount of 2.5L as an interest instead of just 25k (25000) as a conversion fee and reduce the burden of higher EMI’s.

Clear The Myths

A Balanced Revised Rate

An existing borrower might have thought that if his/her interest rates are revised than they are equal to the rate of interest offered to new customers of the Bank/ NBFC. Generally, the borrower does not compare the revised rated with other lenders in advance. For example, X customer is paying 10% interest on his/her loan amount and the revised rate of interest of an existing customer is 9.5% whereas the bank/ NBFC are offering 9.3% to the new customers.

In such case, the borrower can compare with different lenders or negotiate with the Bank/ NBFC. This negotiation might help you to get much lower interest rates.

Switch Fee Cannot be Waived

Your regular EMI payment on time can increase your creditworthiness and can help you to get your switch fee waived off from the new Bank/ NBFC. Though, to get a balance transfer is like playing a gamble as you have to tell your current Bank/ NBFC that the interest rates are on a higher side so you are shifting your loan account to a different lender. In this case, your current provider might offer you waive off of the conversion fees.

No Obligation

If the Bank/ NBFC are reducing your interest rates, so there is no obligation on the lender even if you are ready to pay the switch fee. The only option you are left with is to get a balance transfer of your loan account to a new lender.

No Limitation on the Availability

Though, the lenders do not inform you that they have a policy of giving a conversion fee offer twice or thrice during the complete loan tenor. This also explains the above point that the bank is not obliged to provide you the offer as and when the customer demands.

Hence, if there is any limitation on the number of switch fee offer than just for minor reductions of 0.1% or 0.2%, the borrower should not opt for the balance transfer. This is quite subjective and varies from case to case.

No Loan Conversion Fees

Sometimes, the borrowers get an assurance for not being charged with the balance transfer fee to reduce the interest rate while shifting their loan account to their Bank/ NBFC. But this is not the correct understanding as the concept is not followed by all the lenders. The borrower cannot reduce the burden of EMI’s by paying the switch fee. The conversion fee is charged by all the lenders. But yes, this can be negotiated and this depends on the credit report of the borrower. That’s why the existing customers continue to pay the high rate of interests.

No Choice of Reduction on Fixed Rate of Interest

Few Banks/ NBFC’s offer the existing customers to reduce the interest rates but it depends on the internal policy. Sometimes the employees themselves are not aware of the rules and regulations and simply say NO to the customer. Therefore, the borrower should crosscheck from different sources about the availability of the facility. Always the lenders are not transparent enough to provide you the complete information on their official website.

Conclusion

It is important to understand and calculate the financial impact before accepting any offer from the Bank/ NBFC for the reduction of interest rate on your loan amount and paying an extra amount as a switch fee. The financial impact here refers to your savings throughout the life of your loan. For example, if the borrower is planning to repay the loan amount within next few years, then this might not be a good financially beneficial option to opt for.  The reason behind, the borrower will pay X amount as a switch fee and you may need few months to adjust that X amount. So before finalizing any decision, calculate the expected period to recover the upfront cost, i.e. the fee which you pay for the balance transfer.

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