Low-cost loans to manage tough times
If you can offer a security, the lender will be more lenient
If you can offer a security, the lender will be more lenient.
Mansi Singh ( name changed on request), 42, is a Mumbaibased self-employed professional, who offers branding and marketing communications related consulting to a Us-based company and to another firm in the city. The US company has terminated its contract and the Indian firm’s revenues have also taken a hit. “I have had no assignment for the past month and a half. A lot of my funds are locked up in the market, which I don’t want to sell at a loss. I had one month's emergency fund which I have exhausted,” says Singh, who plans to borrow against her gold jewellery when the lockdown eases.
Like Singh, many people have lost their incomes and salaries in recent times and plan to take a loan. Here are a few lower-cost loan options they may consider.
Loan against fixed deposit:
Banks usually provide a l oan against fixed deposit (FD) at an interest rate that is 1-2 percentage points higher than the interest rate they pay on that instrument (State Bank of India’s FD rate for 1-10 years is 5.70 per cent). The interest rate on these loans is more attractive than on a personal loan, where the interest cost ranges from 8.7524 per cent. “A loan against FD is also easier to get than other types of loans. You can even avail it online,” says Rishi Mehra, chief executive officer, Wishfin.
The tenure of this loan cannot exceed the FD’S tenure. If you fail to repay it before the FD matures, the bank will claim the amount due to it from the maturity amount.
Instead of taking a loan against FD, you also have the option to break it. By way of penalty, the bank will pay you an interest rate that is lower by 50-100 basis points than the contracted rate for the period for which the money was invested. The advantage of breaking the FD is that you get access to the full amount. Some experts favour breaking the FD. “These days the penalty for breaking an FD is so small that you may as well go for it,” says D Muthukrishnan, founder, Wise Wealth Advisors.
Loan against life insurance policy:
A loan facility is usually available on a moneyback, endowment and wholelife policy. You can only avail of a loan after your policy has acquired a surrender value (which usually happens after paying the premium for three years). Lenders will usually lend up to 90 per cent of the policy’s surrender value. The interest rate is around 10 per cent per annum. Make sure you do not allow the policy to lapse while the loan is running.
The key benefits of this loan are a relatively lower interest rate (than on a personal loan) and a shorter approval period. On the flip side, if the borrower passes away, the lender will claim the unpaid loan amount from the death benefit, and the nominee will get only the balance. “From the point of view of availability, loans against FD and against mutual funds are better as you can get them online.
You may find it more difficult to get a loan against an insurance policy as fewer banks offer it. You will also have to visit a bank branch to get it. Approval may take more time,” says Mehra.
Loan against sovereign gold bonds (SGB):
The loan amount can range from ~20,000 to as high as ~20 lakh. It is available both as a demand loan and as an overdraft facility. While the former is for about one year, the latter can run for three years. The loan to value ratio usually does not exceed 65 per cent of the bonds’ value. SBI offers this loan at an interest rate equal to one-year MCLR + 2 percentage points, which comes to 9.9 per cent currently. You can’t sell these bonds while they are pledged.
In times of crisis, people often take resort to gold loans (against their jewellery or other form of physical gold). Gold prices are on the upswing. Gold is also an easy asset for the lender to liquidate, hence it is easy to get this loan. “A secured loan, like a gold loan, is a better option than a personal loan. It can be disbursed within 15 minutes,” says Thomas George Muthoot, promoter-director, Muthoot Fincorp. The interest rate on these loans ranges from 9.1-18 per cent and the loan amount can be as high as ~50 lakh.
EPFO advance:
The new advance facility introduced by the Employees’ Provident Fund Organisation (EPFO) allows its subscribers to withdraw up to 75 per cent of their accumulated corpus or three months of basic plus dearness allowance, whichever is lower. This advance can be availed irrespective of others taken earlier. It's processed fast. It is a non-refundable advance, which means you do not have to replenish your EPF corpus at a later date. Says Deepali Sen, partner, Srujan Financial Advisers says: “First take a loan against FD, life insurance, or any non-equity product. Withdrawing from EPF should be the last resort. If you can manage without touching this money, do so as we Indians don’t have social security and hence should not touch our retirement kitty.”
Finally, with economic conditions turning difficult, loans have also become harder to come by. “At present, banks will be more open to lending to people with whom they already have a relationship. New customers may find it harder to get a loan right now,” says Ranjit Punja, co-founder, Creditmantri.com.
Finally, think hard about the purpose for which you are taking a loan. Loans for consumption are a strict no-no at present. “If a businessman is borrowing, he should ask himself: Does my business have the capacity to bounce back within a few months? Do not borrow and plough more money into a business whose prospects are weak,” says Arun Ramamurthy, an expert at repairing borrowers’ credit scores and author of the book, Unlock the power of your credit score.