FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Alternatives to a personal loan!
When in times of an urgent requirement of funds most people think of a personal loan as the only option. However, there are several types of other loans available in the market, which can be used to raise capital for various requirements in a critical situation. Availing a personal loan though may sound pretty tempting as it is hassle free and unsecured. However, due to its nature it is also the most expensive loan aside from borrowing cash on your credit card! Hence, you should also consider other alternatives to a personal loan. A typical way to do this is to use your existing assets to generate funds in a smart way that needs a closer scrutiny when you are in need of some urgent cash.
Understanding the Basic Types of Loans
There are primarily two types of loans available in the market currently, which can be availed of without sighting any specific purpose thereof. These are secured and unsecured loans. Secured loans are those which can be availed against some kind of asset which is used as a collateral security by lender to cater for the borrower’s inability to keep up the repayment commitments. Due to the inherent security that is provided to the lender in such loans they often come with lower interest rates. Unsecured loans are those which are given without any specific asset being mortgaged as security against the loan. Personal loans and credit card dues come under this category of loans and have higher interest rates as the lender does not have any security as guarantee against non repayment by the borrower. Additionally the unsecured loans have higher processing fees and administrative charges.
This is one of the best alternatives to a personal loan due to a variety of reasons. Firstly, the typical rates for gold loan are lower and are partially dependant on the value of gold given as security vis-à-vis the loan amount. Higher the difference between these two figures lower is the interest rate for the loan. Typically, if one avails a loan of about 80% – 90% of the value of the gold deposited then rates would be around 12 % to 15 % which is still competitive compared to personal loans. The other benefits of a gold loan are its faster processing time and negligible or no processing fees. There are many banks and private lending institutions which provide wonderful options to the customer while availing a gold loan.
Loans against Insurance Policies
Getting loans against an existing insurance policy is yet another option which many people do not try when in need of money. One can avail loans against a policy depending upon its surrender value at that point of time. One can get up to a maximum of about 90 % of the current surrender value of the policy provided the other criteria are met. The policy must be in force for at least 3 years and all premiums paid up regularly for availing a loan against it. In some cases this period may be a minimum of 5 years. Most of insurance companies provide these loans and additionally banks and private lending institutions can also be approached for loans against insurance policies. The typical rates for such loans are about 9% – 10% which is quite good compared to personal loans.
Loans against FDs
Fixed deposits are another class of assets that can be utilized to raise money when the requirement arises. The banks will provide loans against the fixed deposits that one has with them at typical rates which are 1% – 2% higher than the rates being provided on that deposit. This implies that if the bank was paying you 8% on the FD then the loan against the same FD will be at 9% or 10 % which is any day a better option than the personal loan. This is a good way to raise money when in need without having to break the fixed deposit. The value of loan is about 75% – 80% of the current value of the FD.
Loans against Property
Property which is an immovable asset is one of the steadiest sources when it comes to raising capital by mortgaging it. All banks and private lending institutions readily provide loans against property. The interest rates however in this kind of loan are about 13% to 16% which is close to a personal loan. One can get about 50% to 60% of the market value of the property as loan amount. However the banks do tend to under valuate the property when assessing it for the purpose of a loan against property. Getting valuation done by a third party will help you raise a higher amount against the same property. Such loans are handier when one requires a larger sum and should be avoided for smaller amounts that are less than 5 lakhs.
Leveraging your own asset for raising capital is a much wiser means as compared to personal loans which have prohibitive interest rates and also charge a substantial amount as processing fees. Also the penal interest rates in case of a default in payment are quite high in case of the personal loan.
|Loan||Interest Rate||Tenure||LTV||Secured /Unsecured||Processing fees|
|LAP||13-16%||10 years||50-60% of the property’s market value||Secured||1-1.5% of the loan amount|
|Loan against FD||1-2% higher than the rate of FD||Till FD matures||75% to 80% of the maturing amount||Secured||nil|
|Loan against Insurance Policy||9-10%||5 years||90% of the current surrender value||Secured||.25% to 1%|