Increase liquidity by taking low-rate loans on assets
Sowmya Kamath October 5, 2011Money talks! One of the things it may say is goodbye, leaving your finances in a mess. When such a parting of sorts happens, among the options before you is to liquidate bank fixed deposits or to take a personal loan. The former is easy.
However, re-building a fixed deposit is difficult, while a personal loan comes at a high cost. There are some other ways through which you can increase liquidity. One of them is raising funds by pledging your assets. Here, we list assets against which you can take a loan at low rate.
1. FIXED DEPOSITS
You may wonder why you should take a loan against your bank fixed deposit rather than just liquidating the deposit and taking the full amount. One reason is that re-building a fixed deposit is difficult. Another reason is that if you liquidate, the bank will charge a penalty to the extent of 1%. The interest will be reworked according to the period for which you have maintained the deposit.
However, if you take a loan, the interest rate will be just 100-200 basis points, or 1-2%, more than the fixed deposit rate. Most banks lend up to 90% of the deposit amount.
EXPERT TIP: How to choose between FDs and debt funds
"For a fixed deposit of more than Rs 2 crore, we give 70-75% of the amount as loan. For deposits of less than Rs 2 crore, we give up to 90% of the amount," says Arvind Hali, head, retail assets and credit card group, Dhanlaxmi Bank.
This works best if you need money urgently and that too for a short period. Usually, banks offer such loans only if you have maintained the deposit for a long time.
This is the easiest way to raise money as far as the time taken to process the application is concerned. A bank may give you a loan against gold in as short a period as 30 minutes. "We typically accept 22-carat gold and offer up to 75-85% of the market value of the metal," says Hali. The gold is assessed by the bank's valuer. The rate of interest is 14-15%, he says.
Is it safe to invest in gold, silver at current high prices?
Generally, the tenure is up to 1 year. However, banks may give loans for up to 3 years too. So, if you are in a hurry, go for this option, as the number of documents required is very less. "The procedure is simple. For the self-employed, getting a personal loan is a challenge. So, if they have gold, they can use it to get a loan," says Hali. The interest rate is 14-19%.
"When you take a loan against an investment, the basic amount stays intact. It also puts pressure on you to pay back. Otherwise, the whole investment is liquidated and spent," says Suresh Sadagopan, principal financial advisor, Ladder7 Associates.
You can also take a loan against property if it has a clear title and is free from any charge. The interest rate is 13-16%. These loans are mostly taken by self-employed individuals who need money for business expansion/working capital. "The tenure is usually long. Hence, monthly instalments are much less compared to unsecured personal loans," says Raju Pillai, executive vice president and business head, HDFC Bank.
EXPERT TIP: How to cut your home loan burden
The property is valued by experts appointed by the bank. The loan amount may go up to 50-60% of the value of the property. The amount also depends on the applicant's financial position and credit score. "It takes 10-11 days for sanction and disbursement," says Hali.
Also, if you own a property that has been leased to a reputed institution, you can get a loan against that. The maximum loan amount in this case is limited to 60-80% of the rent receivable and 50% of the market value of the property.
You can also raise money against shares, mutual funds and insurance policies. "Loans against securities have been popular with customers who need money at a short notice. These offer flexibility as the money can be utilised on a need basis. For example, one can take an overdraft of half the sanctioned amount and take the other half after some time. With shares available in a dematerialised form, it is now easier to avail of this facility from banks," says Pillai.
EXPERT TIP: Are you insured enough?
However, banks do not accept all shares and insurance policies. You have to check which category of securities and insurance policies the bank accepts. Also, the insurance policy has to be at least three years old.
Banks charge 13-19% a year on these loans, depending on the type of security. While fixing the interest rate, the bank ascertains the applicant's income, the amount sought and the securities offered. It may take 3-4 days to sanction the loan.
Banks also give loans against vehicles at 17-20% interest. The best part is that you can continue using the vehicle. If the vehicle has clear ownership and is free from any charge, banks may lend up to 70-80% of its market value, determined by a bank-appointed expert. The tenure may vary from 3 to 4 years.
"Car loans are model and asset specific," says Hali. This means the manufacturer of the car and the model are key to determining the loan amount.
If you have bought a car by making 100% down payment, the bank will offer 90% of the vehicle's value. A car bought by taking a loan can also get you another loan if you have a clean repayment record.
Even commercial vehicles can be used to get a loan.
The loan is sanctioned within a few days and the money is disbursed after the vehicle is hypothecated to the bank. Banks generally charge a processing fee for such loans, in addition to the fee for transfer of the vehicle's registration.
If you want a loan against your public provident fund (PPF) corpus, you have to approach the bank branch where you have opened the account. However, there is a limit on the amount that can be taken as a loan. An individual can get up to 25% of the amount available in his account in the previous year.
The loan, along with the annual interest of 1%, has to be repaid within 36 months from the sanction date. It can be paid in one go or monthly instalments. Individuals can also withdraw money from their PPF accounts as the rate is lower, but only after five years of subscription. You cannot withdraw more than 50% of the amount available in your account in the previous year.
There are options such as withdrawing money from the employee provident fund (EPF) if you have been a subscriber for 5 years or more. There is also the option of taking a loan against your credit card. However, in this case, the interest rate is high as that on personal loans.