Judicious debt management not only reduces your burden but also helps you build assets
APERSONAL loan may rescue you in an hour of need, but are you aware there exist not only better options but also more secured ones to get money quickly. Financial planners profess a personal loan should be the last item on your menu when shopping for money even if your requirement is immediate. Personal loans and loan on credit cards are responsible for today millions of people under debt trap. Yet these people never realised they had a choice beyond even borrowing from friends and relatives, which was on decent terms and conditions. With the credit history of the borrowers being increasingly considered for any future loans, a lot of your plans for today and tomorrow depend on how respectfully you manage your debt. Judicious debt management helps not only reduce the burden but also grows assets. It is the most practical way to evade debt in the financial ecosystem. Here's a ready reckoner on better alternatives to a personal loan.
Loan against gold
It's the easiest and quickest mode of arranging funds in case of an urgent requirement. Also known as loan against jewelry, the money can be even secured in one working day–as long as you have proper identity and residence proof. Some of the specialist lenders in this space such as Mannapuram and Muthoot even disburse it in an hour or two. The interest rate is typically calculated on the basis of how much margin of safety you are willing to leave for the lender. In short, the more jewelry you pledge for the loan amount, lower will be your interest rate. The interest rate generally varies between 10% and 17%.
However, what makes it score over other means is it's available irrespective of your credit history. Then, it's available at reasonable rates of interest especially if the amount borrowed does not exceed 50-60% of the market value of the jewelry. The process is fairly streamlined with the jewelry assessor sitting in the lenders' branch or available very near the branch where it is valued and then your jewelry is sealed in a pouch in your presence.
"Besides, repayment can be structured as just interest amount, with principal repaid at the end of the period in one lump sum. This means regular payments can be smaller than what an EMI would be for the same period," says Harsh Roongta, CEO of Apnapaisa.com, a price comparison website for loans, insurance and investments. Thus, if you apply an interest only loan of 2 lakh for two years at 12%, your monthly payment will be 2,000 for two years but you will need to repay the loan with a lump sum payment of 2 lakh at the end of two years. Whereas the EMI for a two-year loan at the same interest rate would be around 9,400. That's simply because you are repaying the whole loan amount at the end of 24 installments.
Moreover, if you can wait for a day or two, experts say you should look at private and public sector banks, which offer these loans at a more reasonable rate of interest. The only drawback with these loans is since jewelry is an item of personal use, its emotional value is far higher than its market value. If for any reason you are unable to payback the loan the lender can sell your jewelry in the market to recover its dues after which you can get back your jewelry back.
Loan against movable property
This is the other option that is reasonably quick. The loan is available against moveable securities such as listed shares, units of mutual funds, bonds, National Savings Certificates (NSCs), or against surrender value of your life insurance policy. These securities are fairly priced at 8%-15% but creation of securities usually takes a little time.
The best thing about all these loans are that you can use securities belonging to third parties–say your parents, siblings or friends–as long as they are willing to become co-borrowers for the loan. Again, these loans are available irrespective of your credit history. In the case of listed shares or mutual fund units or unit-linked policies, each bank has its own list of approved shares or schemes and if your shares or scheme is not within that, then the loan may not be possible.
Traditional policies with the Life Insurance Corporation (LIC) are the best bet. You can secure a loan from the LIC itself. Loan against policies, with 90% of surrender value, in fact, is available in days at an interest rate of as low as 8%.
Usually, loans against endowment type policies are mostly preferred. Loans are not given against pure-risk term policies. And even are less preferred against Ulips. In these loans, you can repay the loan with interest or continue paying the interest and allow the loan to be deducted at the time of the claim or maturity payments. The process is simple and speedy. With this form of loans, the best part is interest is charged only on utilised amount. Even you can avail a term loan facility available against select securities.
In the case of a NSC, you can take a loan by pledging it to the central bank or a scheduled bank or a co-operative society. For loans against NSC or KVP, banks usually charge 3.5% over the base rate or .5 % over NSC or KVP rate, whichever is higher. All options are good though if you take it from a scheduled bank with which you already enjoy a good business relationship, you can negotiate on certain charges. Loans are always easier to manage if they are linked to one's savings bank account.
Other options
Nowadays, employers offer loan to their employees as part of their employee welfare programs. Majority of the big corporate houses and MNCs extend this facility. Some companies even offer interest-free loans, though the amount of loan is typically small in such cases. You can either apply for an advance salary or a loan, which will be charged at a nominal interest rate.
Another safe option is to use your fixed deposit by taking an overdraft against it. You can avail up to 80-85% of the deposit amount. The interest rate is charged 1-2% higher than the prevailing deposit rate. But there's a rider, your repayment would have be made in this case within the time period for which you own the fixed deposit.
