Improved Credit Score? Here’s How Switching Your Existing Loan Could Save You Lakhs in Interest
An improved credit score can do more than strengthen your chances of getting a fresh loan. It may also help reduce the interest burden on an existing borrowing. People who took loans several years ago might now have a stronger income, better repayment records and a healthier credit profile.
However, their existing interest rates may still reflect their earlier financial circumstances.
Refinancing or transferring the outstanding loan to another lender could offer a way to secure better terms. The decision, though, requires a closer look at the potential savings, remaining repayment period and additional charges.
Someone who previously had a modest salary or an inconsistent credit record might have received a relatively expensive loan. If their financial position has improved since then, they may qualify for more competitive borrowing terms.
Rather than continuing with the original interest rate, borrowers can approach their existing lender to negotiate a reduction or explore refinancing options with another financial institution.
Tanish Sharrma, Co-founder, CEO and CTO of BillCut, explains that an improved credit score becomes financially useful when borrowers use it to negotiate better lending conditions.
A balance transfer essentially involves moving the outstanding loan amount from one lender to another, usually to secure a lower interest rate or more favourable repayment terms.
However, a higher credit score does not automatically guarantee approval or a cheaper loan. Each lender follows its own eligibility requirements and risk assessment process.
Consider a borrower with an outstanding home loan of Rs 50 lakh and 15 years left to repay. At an annual interest rate of 9.5%, the monthly equated monthly instalment (EMI) would be approximately Rs 52,211.
If the borrower transfers the loan to another lender offering 8.5%, the monthly EMI could decline to around Rs 49,237, assuming the remaining tenure stays unchanged.
This translates into an EMI reduction of approximately Rs 2,974. Over the remaining repayment period, the borrower could save nearly Rs 5.35 lakh in interest.
The benefit becomes considerably larger if the new lender offers an interest rate of 7.5%. In that situation, the EMI would fall to approximately Rs 46,351, while the overall interest saving could reach around Rs 10.55 lakh.
Smaller loans, however, may not generate comparable benefits.
For instance, transferring a personal loan of Rs 5 lakh with three years remaining from an interest rate of 16% to 15% would produce an estimated interest saving of only Rs 8,850.
According to Sharrma, even a reduction of 0.5 percentage points can make a meaningful difference on a large home loan with a substantial repayment period remaining. Shorter loans generally require a bigger interest rate reduction to justify the switching expenses.
The first is to accept a lower EMI and improve monthly cash flow. This can be useful for households managing several financial commitments or dealing with rising living expenses.
The second approach is to continue paying approximately the same EMI as before, allowing the lower interest rate to reduce the outstanding principal more quickly.
The difference can be significant over time.
Returning to the example of a Rs 50 lakh home loan with 15 years remaining, the original EMI at 9.5% is approximately Rs 52,211.
If the borrower secures an interest rate of 8.5% but continues paying the original EMI, the loan could be closed around 19 months earlier. The estimated interest saving would increase to approximately Rs 10.1 lakh.
At an interest rate of 7.5%, maintaining the same monthly payment could shorten the repayment period by roughly 33 months. The total interest saving could rise to around Rs 17.5 lakh.
This strategy can be particularly useful for borrowers whose monthly income has increased and who do not need the additional cash-flow relief from a lower EMI.
However, anyone considering this approach should ensure that the higher monthly payment remains affordable and does not affect essential expenses or emergency savings.
The outstanding principal and remaining tenure are equally important. As a loan approaches its final years, a larger proportion of the repayment schedule has already been completed, reducing the potential benefit of switching.
Sharrma highlights this through the same Rs 50 lakh home loan example.
After 10 years of repayment, the outstanding amount would be approximately Rs 24.9 lakh. With only five years remaining, reducing the interest rate from 9.5% to 8.5% would save roughly Rs 72,000 in interest.
That amount could be substantially reduced after accounting for the expenses associated with refinancing.
These may include loan processing charges, legal verification fees, property valuation expenses and foreclosure charges, wherever applicable.
Borrowers should calculate the total switching expenses and compare them with the expected monthly savings.
Sharrma suggests using the time required to recover these expenses as an important decision-making factor. If the savings can cover the switching costs within approximately a year, refinancing may be worth exploring. However, this should be treated as a general guideline rather than a guaranteed benchmark.
Under the Reserve Bank of India's applicable framework, regulated lenders cannot levy prepayment charges on floating-rate loans taken by individuals for non-business purposes. The specific rules depend on the loan category and applicable regulatory provisions.
Fixed-rate loans may have different conditions, and foreclosure charges can apply depending on the lender's policy and contractual terms.
Borrowers should therefore examine their existing loan agreement before making a transfer decision.
It is also sensible to obtain a written estimate of all charges from the prospective lender rather than relying only on the advertised interest rate.
A strong credit profile can improve the likelihood of receiving competitive offers, but lenders do not follow one universal credit score threshold that guarantees a lower rate.
Consider a borrower transferring a Rs 50 lakh home loan from an interest rate of 9.5% to 8.5%.
If the remaining repayment period is increased from 15 years to 20 years, the monthly EMI would decline to approximately Rs 43,391. This is nearly Rs 8,800 less than the original monthly payment.
At first glance, the arrangement may seem beneficial because it provides considerable relief to the monthly budget.
However, the longer repayment period changes the overall cost of borrowing. The total interest payable could rise to approximately Rs 54.1 lakh, around Rs 10 lakh more than the interest on the existing 15-year repayment schedule.
This illustrates why borrowers should not judge refinancing decisions solely by the reduction in EMI.
Extending the tenure may be reasonable for someone experiencing financial pressure or needing to manage immediate cash-flow difficulties. Nevertheless, the additional interest cost should be understood before accepting the revised terms.
The following factors deserve particular attention:
The most suitable decision depends on the amount outstanding, the interest rate offered, the remaining repayment period and the total expenses involved. Borrowers who examine these factors carefully can avoid unnecessary charges and make better use of their improved financial standing.
Disclaimer: This article is intended for informational purposes only and should not be considered financial or investment advice. Loan interest rates, eligibility conditions, charges and regulatory provisions may vary. Borrowers should consult their lender or a qualified financial adviser before making refinancing decisions.
However, their existing interest rates may still reflect their earlier financial circumstances.
Refinancing or transferring the outstanding loan to another lender could offer a way to secure better terms. The decision, though, requires a closer look at the potential savings, remaining repayment period and additional charges.
Why Your Improved Credit Score Could Help Reduce Loan Costs
Lenders assess several factors before deciding the interest rate on a loan. These typically include the applicant's credit score, income, repayment history, existing financial obligations and overall ability to repay.Someone who previously had a modest salary or an inconsistent credit record might have received a relatively expensive loan. If their financial position has improved since then, they may qualify for more competitive borrowing terms.
Rather than continuing with the original interest rate, borrowers can approach their existing lender to negotiate a reduction or explore refinancing options with another financial institution.
Tanish Sharrma, Co-founder, CEO and CTO of BillCut, explains that an improved credit score becomes financially useful when borrowers use it to negotiate better lending conditions.
A balance transfer essentially involves moving the outstanding loan amount from one lender to another, usually to secure a lower interest rate or more favourable repayment terms.
However, a higher credit score does not automatically guarantee approval or a cheaper loan. Each lender follows its own eligibility requirements and risk assessment process.
How Much Can a Lower Interest Rate Save?
The financial advantage of refinancing depends largely on the outstanding principal and the number of years remaining on the loan.Consider a borrower with an outstanding home loan of Rs 50 lakh and 15 years left to repay. At an annual interest rate of 9.5%, the monthly equated monthly instalment (EMI) would be approximately Rs 52,211.
If the borrower transfers the loan to another lender offering 8.5%, the monthly EMI could decline to around Rs 49,237, assuming the remaining tenure stays unchanged.
This translates into an EMI reduction of approximately Rs 2,974. Over the remaining repayment period, the borrower could save nearly Rs 5.35 lakh in interest.
The benefit becomes considerably larger if the new lender offers an interest rate of 7.5%. In that situation, the EMI would fall to approximately Rs 46,351, while the overall interest saving could reach around Rs 10.55 lakh.
Smaller loans, however, may not generate comparable benefits.
For instance, transferring a personal loan of Rs 5 lakh with three years remaining from an interest rate of 16% to 15% would produce an estimated interest saving of only Rs 8,850.
According to Sharrma, even a reduction of 0.5 percentage points can make a meaningful difference on a large home loan with a substantial repayment period remaining. Shorter loans generally require a bigger interest rate reduction to justify the switching expenses.
Lower EMI or Shorter Loan Tenure: Which Is Better?
Once a lender approves a balance transfer at a reduced interest rate, borrowers generally have two ways to benefit.The first is to accept a lower EMI and improve monthly cash flow. This can be useful for households managing several financial commitments or dealing with rising living expenses.
The second approach is to continue paying approximately the same EMI as before, allowing the lower interest rate to reduce the outstanding principal more quickly.
The difference can be significant over time.
Returning to the example of a Rs 50 lakh home loan with 15 years remaining, the original EMI at 9.5% is approximately Rs 52,211.
If the borrower secures an interest rate of 8.5% but continues paying the original EMI, the loan could be closed around 19 months earlier. The estimated interest saving would increase to approximately Rs 10.1 lakh.
At an interest rate of 7.5%, maintaining the same monthly payment could shorten the repayment period by roughly 33 months. The total interest saving could rise to around Rs 17.5 lakh.
This strategy can be particularly useful for borrowers whose monthly income has increased and who do not need the additional cash-flow relief from a lower EMI.
However, anyone considering this approach should ensure that the higher monthly payment remains affordable and does not affect essential expenses or emergency savings.
When Does Refinancing Stop Making Financial Sense?
One of the biggest mistakes borrowers can make is evaluating a balance transfer only by comparing interest rates.The outstanding principal and remaining tenure are equally important. As a loan approaches its final years, a larger proportion of the repayment schedule has already been completed, reducing the potential benefit of switching.
Sharrma highlights this through the same Rs 50 lakh home loan example.
After 10 years of repayment, the outstanding amount would be approximately Rs 24.9 lakh. With only five years remaining, reducing the interest rate from 9.5% to 8.5% would save roughly Rs 72,000 in interest.
That amount could be substantially reduced after accounting for the expenses associated with refinancing.
These may include loan processing charges, legal verification fees, property valuation expenses and foreclosure charges, wherever applicable.
Borrowers should calculate the total switching expenses and compare them with the expected monthly savings.
Sharrma suggests using the time required to recover these expenses as an important decision-making factor. If the savings can cover the switching costs within approximately a year, refinancing may be worth exploring. However, this should be treated as a general guideline rather than a guaranteed benchmark.
Check Prepayment Rules Before Transferring Your Loan
The charges applicable when closing an existing loan can influence the overall benefit of a balance transfer.Under the Reserve Bank of India's applicable framework, regulated lenders cannot levy prepayment charges on floating-rate loans taken by individuals for non-business purposes. The specific rules depend on the loan category and applicable regulatory provisions.
Fixed-rate loans may have different conditions, and foreclosure charges can apply depending on the lender's policy and contractual terms.
Borrowers should therefore examine their existing loan agreement before making a transfer decision.
It is also sensible to obtain a written estimate of all charges from the prospective lender rather than relying only on the advertised interest rate.
A strong credit profile can improve the likelihood of receiving competitive offers, but lenders do not follow one universal credit score threshold that guarantees a lower rate.
A Smaller EMI Could Mean a Bigger Interest Bill
A lower monthly payment can appear attractive, particularly when household expenses are increasing. However, extending the repayment period during refinancing can sometimes make the overall loan considerably more expensive.Consider a borrower transferring a Rs 50 lakh home loan from an interest rate of 9.5% to 8.5%.
If the remaining repayment period is increased from 15 years to 20 years, the monthly EMI would decline to approximately Rs 43,391. This is nearly Rs 8,800 less than the original monthly payment.
At first glance, the arrangement may seem beneficial because it provides considerable relief to the monthly budget.
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However, the longer repayment period changes the overall cost of borrowing. The total interest payable could rise to approximately Rs 54.1 lakh, around Rs 10 lakh more than the interest on the existing 15-year repayment schedule.
This illustrates why borrowers should not judge refinancing decisions solely by the reduction in EMI.
Extending the tenure may be reasonable for someone experiencing financial pressure or needing to manage immediate cash-flow difficulties. Nevertheless, the additional interest cost should be understood before accepting the revised terms.
What Borrowers Should Calculate Before a Balance Transfer
Before approaching a new lender, borrowers should collect their latest loan statements and compare the available offers using the same outstanding principal and repayment period.The following factors deserve particular attention:
- Outstanding principal: Check how much of the original loan remains unpaid.
- Interest rate difference: Calculate the actual reduction offered by the prospective lender.
- Remaining tenure: Assess whether enough repayment time is left to generate meaningful savings.
- Switching expenses: Include processing, legal, valuation and applicable foreclosure charges.
- Total repayment: Compare the complete interest outgo rather than focusing only on the revised EMI.
- Repayment flexibility: Check whether the new lender offers suitable prepayment and part-payment facilities.
The most suitable decision depends on the amount outstanding, the interest rate offered, the remaining repayment period and the total expenses involved. Borrowers who examine these factors carefully can avoid unnecessary charges and make better use of their improved financial standing.
Disclaimer: This article is intended for informational purposes only and should not be considered financial or investment advice. Loan interest rates, eligibility conditions, charges and regulatory provisions may vary. Borrowers should consult their lender or a qualified financial adviser before making refinancing decisions.
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