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Nothing Personal

Nothing Personal

Borrowing against assets such as gold or property can be a lot cheaper than a personal loan.

Do you urgently need cash for your daughter's wedding or to renovate your house? The easiest option that comes to mind is a personal loan. After all, it's a quick solution to ensure liquidity for a short duration. But it's a dirty one as well.

Personal loans are unsecured, which makes them expensive, with interest rates of 13-22 per cent. Besides, banks like ICICI Bank offer personal loans only to its existing customers. There is, however, another option. Your assets-house, gold jewellery, stocks, insurance policies and vehicles-can help you get loans at cheaper rates.

Here are some such assets that can be leveraged to acquire short-term loans:

Property | Interest rate: 11-15 per cent

You usually invest a large portion of your life's savings in your dream house. In your hour of need, it can help you get a loan of 40-75 per cent of its market value at an interest rate of 11-14.75 per cent. To be eligible for this loan, you will need a clear title of the property, along with a regular source of income. As property is an illiquid asset, banks want to avoid the hassle of recovering the default amount (if any) by selling a mortgaged house. This is why they will demand an income proof before giving you the loan.

Apart from term loans, several banks offer an overdraft facility against property, wherein you can withdraw up to the sanctioned amount of the loan. "An overdraft (loan) allows customers to repay their outstanding loan in parts based on their cash flows. Further, the repaid amount is available as a credit line, which can be used if needed," says Biju Pillai, executive vice-president, HDFC Bank.

The interest gets accrued only on the amount withdrawn from the overdraft loan account. However, it needs to be paid on a regular basis as it accrues in the account. You also need to pay an annual account maintenance charge for the overdraft facility.

Rental Income | Interest rate: 12-14 per cent

If you have a rental income from residential or commercial property, which has been leased to a reputed company or institution, you can get a loan at 12-14 per cent interest. While taking a loan against future rental income, the maximum amount is generally limited to 60-85 per cent of the rent receivable and 50 per cent of the property's market value.

The bank enters into a tripartite agreement with you and your tenant, and starts getting the rent directly. The loan has to be repaid before the expiry of the rent lease or 6-8 years, whichever is earlier.

Gold | Interest rate: 11-17 per cent

Diamonds may be a girl's best friend, but gold will get her a cheaper loan. Apart from banks, several non-banking financial companies also offer loans against gold. While all lenders accept gold ornaments, some even take coins and bars. You can also pledge gold exchange-traded funds (ETFs).

You can get 70-90 per cent of the gold's value and, at 11-17 per cent interest rate, gold loans are cheaper than most loans, except those for home. The rate of interest depends on the margin left for the financier. In other words, a loan of Rs 75,000 against jewellery worth Rs 1 lakh will be cheaper than a loan of Rs 90,000. Hallmark jewellery will get you a better deal.

Such loans are available only for short durations and have to be repaid within six months to three years. Specialist gold finance companies also offer loans for terms ranging from a few days to weeks. If you need more time for repayment, you can get the loan renewed.

If you need money immediately, gold loan is the right option as most banks disburse it on the same day, while gold financing firms do so within an hour or so.

Don't forget to service the loan on time. The lender can sell your gold after the 90-day grace period is over. You wouldn't want that to happen if there is an emotional value attached to the jewellery.

Insurance Policies | Interest rate: 9-16 per cent

If you have invested in wealth accumulation policies, such as endowment plans, you can meet your short-term monetary requirements by pledging these with the insurer or a bank. Some Ulips can also be pledged. The amount you can avail of depends on the total premium paid and the surrender value of the policy.

Life Insurance Corporation of India offers up to 90 per cent of the surrender value of its policies at an attractive interest rate of 9 per cent per annum paid half yearly. Banks offer these loans at 12-16 per cent.

Securities | Interest rate: 12-16 per cent

You can use your investment in shares, mutual funds, bonds and government securities to get a loan at 12-16 per cent. All that you have to do is pledge these with your bank.

You can get a loan of up to 50 per cent of the market value of the equities in your demat account. However, banks accept stocks of only select companies and these are required to meet certain parameters, such as the price to earnings (PE) ratio, 52-week highs and lows, etc. For example, State Bank of India will not accept a share which has a PE ratio of more than 40.

If your spouse and other family members hold shares in separate demat accounts, you can apply for a joint loan. The shares can be pledged from the respective demat accounts.

"Loans against securities are usually disbursed between 1-7 days depending on the assets involved. Typically, the time taken is for lien-marking the asset in favour of the bank, which depends on the entity involved. For demat securities, the process is usually faster," says Pillai.

Mutual funds can also be used for securing loans of up to 50 per cent of the fund value. As in the case of equities, banks are choosy and lend only against select category of funds. You can club your equity and mutual fund portfolios while applying for a loan.

In the case of government bonds, such as National Savings Certificate and Kisan Vikas Patra, banks offer loans of up to 80 per cent of the value of the paper. Banks also accept gold deposit certificates, gold exchange-traded funds and non-convertible debentures. However, you cannot mortgage equities and bonds simultaneously.

While taking a loan against equities, ensure that you pledge the shares that you intend to hold for a period longer than the loan tenure. Also, don't exhaust the loan eligibility limit.

Your portfolio is valued periodically and your loan eligibility limit varies in tandem with the market price of the shares. If the loan amount exceeds the one that you are eligible for, the bank will ask you to pay the difference or pledge more shares. If you are unable to pay, your stocks can be sold at the prevailing market price, which is bound to be low.

Vehicles | Interest rate: 14-16 per cent

In your quest for a cheaper loan, take your car along. If you have purchased a car by making a 100 per cent down payment, some banks will offer you a loan of up to 90 per cent of the vehicle's value. A car bought by taking a loan can also get you a cheaper loan if you have a clean repayment track record. Banks offer up to 100 per cent of the original loan amount.

These loans have an interest rate of 14-16 per cent. Banks assign age limits to cars and the loan tenure is restricted to the residual period. For example, HDFC Bank provides loans on vehicles up to eight years old. If you have a six-year-old car, you can avail of a loan for two years.

Before sanctioning a loan, the bank may have the car valued. The maximum loan that can be secured against a vehicle also depends on its age. Both commercial and personal vehicles can be used as security for these loans.

It gets sanctioned within a few days and the money is disbursed after the vehicle is hypothecated to the bank and the registration certificate submitted to the lender. Banks charge a processing fee of around 2 per cent, in addition to the charges for transfer of the vehicle's registration certificate.

Credit Card Limit | Interest rate: 16-24 per cent

You can avail of a loan against your unused credit card limit, which is similar to a personal loan without the need for documentation. Your credit card company will disburse the loan within 1-3 days and reduce the credit limit by the quantum of loan amount. As you repay the loan, your credit limit goes up accordingly, and is restored on complete repayment.

Banks such as HDFC Bank and Citibank offer this facility. The interest rate for these loans is at par with or higher than that for personal loans.

The rate varies for individuals in accordance with their credit card and repayment track record. A faster processing period gives it an edge over personal loans.

Loan from Employer | Interest rate: 0-10 per cent

If you are a salaried person, check if your employer gives advance or loans to its employees. It can be one of the best alternatives to personal loans as the interest rate will be low and the entire process will require minimum documentation, if any.

An interest-free or concessional loan is considered a perquisite and the saving on interest will become taxable in your hands. However, this rule does not apply to loans of up to Rs 20,000 or if it's given for treatment of diseases mentioned in Rule 3A of the Income Tax Rules.