Nothing Personal

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

Pritam P Hans        Print Edition: December 2010

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The interest gets accrued only on the amount withdrawn from the overdraft loan account.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.

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