Is the Balance Transfer Actually Worth It After Costs?
Ms. Fathima holds a personal loan with your bank: outstanding principal ₹2,40,000, remaining tenure 18 months, interest 13.5% per annum on a reducing balance, EMIs being paid on time. A competing bank's representative has offered her a balance transfer at 11.25% per annum reducing balance over 18 months, with a processing fee of 0.5% of the transferred amount. Your bank levies a foreclosure charge of 2% of the outstanding principal if she closes the loan early; the competing bank has said it will 'look into' reimbursing it, but nothing is in writing. Fathima asks you, as the officer handling her account, whether the transfer is worth it. She is a school teacher, her salary account is with your branch, and she has never missed an EMI.
1. Compute both EMIs and the total interest under each option, then the switching cost. What is the net saving from transferring?
Read the worked answer
Existing loan (13.5%, i.e. 1.125% per month, n = 18): EMI = 2,40,000 × 0.01125 × (1.01125)^18 ÷ [(1.01125)^18 − 1] (1.01125)^18 ≈ 1.22315 = 2,40,000 × 0.0137604 ÷ 0.22315 ≈ ₹14,799 Total paid = 14,799 × 18 ≈ ₹2,66,382 → interest ≈ ₹26,382
Transfer offer (11.25%, i.e. 0.9375% per month, n = 18): (1.009375)^18 ≈ 1.18289 EMI = 2,40,000 × 0.009375 × 1.18289 ÷ 0.18289 ≈ ₹14,552 Total paid ≈ ₹2,61,941 → interest ≈ ₹21,941
Interest saved = 26,382 − 21,941 = ₹4,441
Switching costs:
- Processing fee 0.5% × 2,40,000 = ₹1,200
- Foreclosure charge 2% × 2,40,000 = ₹4,800
- Total = ₹6,000
Net position = 4,441 − 6,000 = −₹1,559. On the stated terms she is worse off by about ₹1,560.
2. At what point does the processing fee alone pay for itself? How does the foreclosure charge change the picture, and what would you tell her?
Read the worked answer
Break-even on the processing fee: First-month interest difference = 2,40,000 × (0.01125 − 0.009375) = ₹450, and it declines each month as the principal falls; the average gap is about ₹247 a month (4,441 ÷ 18). So ₹1,200 is recovered in roughly 5 months - the fee alone is comfortably covered within the 18-month tenure.
The foreclosure charge is the deal-breaker. ₹4,800 is more than the entire ₹4,441 interest saving. No repayment pattern recovers it, because it is a fixed upfront cost larger than the total benefit being purchased. The transfer only works if that ₹4,800 is eliminated or offset.
What to tell her, plainly: 'On the numbers you have been quoted, the transfer costs you about ₹1,560 more than staying. The rate is genuinely lower, but the 2% foreclosure charge on our side swallows the gain. If the other bank confirms in writing that it will reimburse the foreclosure charge, the position reverses and you gain about ₹3,240 - but get it in writing before you sign anything, not after.'
Add one caution: a new loan also triggers a credit enquiry and a new repayment record, which is a real but non-cash cost.
3. Suppose the competing bank does confirm in writing that it will reimburse the foreclosure charge. Recompute and state your recommendation, including whether the customer stays with your branch.
Read the worked answer
Recomputed position:
| Item | ₹ |
|---|---|
| Interest saved over 18 months | +4,441 |
| Processing fee (0.5%) | −1,200 |
| Foreclosure charge (2%) | −4,800 |
| Reimbursement (in writing) | +4,800 |
| Net gain | +3,241 |
Recommendation: the transfer becomes marginally beneficial - about ₹3,240, or roughly ₹180 a month over 18 months - and I would tell her so honestly rather than talk her out of it.
Why honesty is the right commercial call here:
- She is a salary-account customer with a clean repayment record. If she discovers later that the branch concealed a genuine saving to retain ₹2.4 lakh of book, the salary account and any future home loan go with her.
- The saving is small enough that the certainty of the written reimbursement, not the amount, is what should decide it. If the offer is verbal or conditional, the answer flips back to staying.
- A defensible middle path: ask whether our bank will waive the foreclosure charge to retain the account. A waiver costs the branch less than the interest income it would lose, and it keeps the relationship. Present that as an option, not as pressure.