Personal loans, being unsecured by nature, are priced much higher than a loan that has a security attached to it. For smaller loans, you needn’t collateralise your home or your vehicle, you can borrow against smaller market-linked securities or those having a fixed value
With consumer spending on the rise and loans being an expensive option, it is time to find other sources from where you can generate a cash flow from. Should you look at additional income by way of a part time job? That would be a little too taxing. Is it then, not better to unlock your existing assets by taking a loan against them, while preserving their value? And yes, we are not asking you to sell your assets off. Only borrowing against them as a security, instead of taking a personal loan!!
You can borrow against smaller securities that could range from being market-linked such as equity shares, mutual Funds, ETFs, gold deposit certificates, RBI bonds to those having a fixed value such as traditional life insurance policies, National Savings Certificates (NSC), Kisan Vikas Patra (KVP), NABARD's Bhavishya Nirman Bonds and Non Convertible Debentures.
Consider this: For loans against securities from Axis Bank, the interest rates would be 13% for an amount below Rs 10 lakh and 12.75% for amount above Rs 10 lakh, whereas for personal loans, it could range anything between 15% and 24%, irrespective of the amount of apply for. And if you take a personal loan from ICICI bank, it charges you anywhere between 16 to 18.5%, whereas, for Loan against security, for amount below Rs 10 lakh, interest of 13.5% would be levied and for loan from 10 to 15 lakh, 13.25% of interest rate would be levied.
There is a difference in securities that banks and financing institutions would give loan against and also in the loan-to-value ratio or LTV, which is the ratio of the value of the security that will be given you as a loan. Generally the LTV is as low as 50% for market-linked securities such as equity shares and equity mutual funds, due to their volatile nature and as high as 80-90% for debt mutual funds and other debt-based investments.
For traditional insurance policies, the eligible amount is benchmarked against the surrender value. For example, for an LIC endowment policy, the maximum loan amount available would be 90% of the surrender value of the policy (85% in case of paid up policies) including cash value of bonus, where surrender value is 30% of the total premiums paid (for at least three years), excluding premiums for the first year and all extra premiums. This means you cannot take loans on traditional policies before you have paid premiums for at least three years.
For loans against fixed deposits, banks generally levy a margin over and above the rate allowed for the deposit. For example Punjab National Bank offers loans against fixed deposits at an interest rate of 2% over and above the rates offered on fixed deposits. For example if you apply for loan against a Rs50,000 fixed deposit that has three to four years remaining to maturity, you would be provided Rs40,000 as loan, 10% retained as the margin amount. Comparatively lower margins are retained for present, retired and widows of staff members.
Loans against KVP/NSC are provided at rates connected to the base rate by banks, for example, Allahabad bank charges base rate+4%, effectively 14%, as of today.
The idea behind taking a loan against securities of smaller value springs from facts that you do not need to pledge large assets for small loan amounts and do not need to spend on their valuation and legal documentation. On the other hand, they are better then personal loans due to their inexpensive nature and speedier processing.
Before pledging your assets for loans, think of why and for what time you invested in them. Term plans, for example, are protection products and we advise not taking loans against such products, which could harm you in case of eventuality. In case you have a cushion on insurance policies apart from the basic term plan with adequate cover, you may opt for taking loans against the other policies.
Other than insurance plans, check how taking a loan affects your alignment of goals that you made these investments for. An example—taking a three-month loan against an equity mutual fund you invested in for your daughter’s marriage, 18 years from now. Such loans do not erode your wealth, due to the virtue of time that you have on your side. Avoid pledging securities near maturity, or you will lose out on your objective of investment.
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