These are tough times for people across the country due to lockdown. One reason is that many citizens were unprepared for its impact on our incomes and were caught off-guard. While the government has come out with many schemes to support those in lower income groups, the only relief the middle-class has got is moratorium on payment of EMIs till May. While most self-employed people are facing a huge disruption in business and income loss, things are not much better for many salaried employees either due to delay in payment of salaries and, in some cases, even pay cuts and job losses.
The first impulse of a person facing a financial crunch is to approach a bank for a personal loan. However, there are a host of other options than a personal loan.
Understand Your Requirement
The first thing you should be clear about is the nature of your need. Is your expense avoidable at this stage? If no, can you ensure spending of as little amount as possible? And, is your problem temporary or are there chances of income disruption lingering on for a longer period?
If the disruption is likely to continue for a longer period, it is better to liquidate investments rather than take a loan, and opt for a drastic cut in both discretionary and day-to-day expenses. Avoid borrowing till your income prospects improve. Take a loan only if you are sure about your future income and repayment capacity.
Your Options - And Their Cost
The first thing you need to check is your investments not linked to any goal. Avoid liquidating equity investments at this stage to avoid booking a loss and erode chances of gaining from a possible recovery in future. Use fixed income investments and gold first. You may also look at taking a loan against investments such as fixed deposits (FDs) and public provident fund (PPF). Redeeming these is not a good idea as they are usually linked to some long-term life goals. "Loans against PPF and FDs are probably the cheapest among all options followed by loans against securities and gold. The interest rate of loan against FDs is usually around 2 per cent higher than the interest rate earned on liened FDs," says Naveen Kukreja, CEO and Co-founder, Paisabazaar.com. Loan against PPF is available at 1 per cent interest. However, you lose earning interest on the amount of money borrowed.
You can also look at loan against financial securities such as shares and mutual funds. "Loans against FDs and securities are usually offered in the form of overdraft. The borrower can keep drawing and repaying within the sanctioned limit any number of times till the termination of the facility. The interest is charged only on the drawn amount till its repayment," says Kukreja.
Loan Against Gold: Gold loan gives one of the most flexible repayment options. The recent surge in gold prices has increased the amount of money people can raise against the yellow metal. While there is also the usual EMI option, you can also choose to pay interest at the time of the loan or each month and pay the principal at the end of the loan tenure. Besides, this product has many customisable variants. The interest cost is on the lower side. "The interest rate of gold loan and loan against securities usually starts from 9-9.5 per cent per annum. However, availing these options may not be easy as most banks are working with limited staff and NBFCs are unable to function due to lockdown constraints," says Kukreja.
Employee Provident Fund: While 75 per cent and 100 per cent EPF withdrawal is allowed in case of unemployment for one month and two months, respectively, the government recently allowed people to take 75 per cent of their EPF balance as non-refundable advance. This amount should not be more than three months basic salary. However, as EPF money is meant for your post-retirement life, you should be cautious while using this option. "Unless there is an emergency, EPF withdrawal should be the last resort," says Bala Parthasarathy, CEO and Co-founder, MoneyTap.
Bank and Credit Card: Personal loans should be your last line of defence due to higher interest cost. However, you can still look at the least costly personal loans. One of these could be a pre-approved offer given by your existing bank and credit card providers. "Credit card holders with good repayment history are usually offered a pre-approved loan against the card. The interest rates for personal or credit card loans start from 11 per cent per annum depending on your credit history, monthly income, occupation, etc. The tenure can go up to five years," says Kukreja of Paisabazaar.com.
Fintech Lenders: When you have no other source of funding left, you can go for loans from fintech players which are offered online. However, you should use this option only when you are sure about your future income and comfortable about your ability to repay. These loans usually have a higher interest rate and so it will be better to keep the tenure as short as possible to minimise the interest cost.
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