The Buyt Desk
A financial emergency can lead you to a debt trap. When you are in need of sudden money and have assets that you cannot liquidate you feel stuck. But there are certain assets that can help you in getting a loan by becoming a guarantee for the loan.
Start building such assets from a very early age. They can give you returns and you can also avail loans against them when needed. Finance people say that debt is a double-edged sword as both the moneylender and the borrower can hurt each other. A well-managed debt is profitable to the lender and helpful to the borrower to achieve his /her goals. The more assets you have the richer you are and your creditworthiness increases enhancing your borrowing eligibility. Many assets become instruments that help you reach your goals in personal and professional life. Immovable property, mutual funds, securities, bonds, physical precious metals, equities, FDs and real estate are few such assets. Let us study in detail a few of these assets.
Loan against Gold
Gold is present in almost all Indian households. Gold is purchased more for cultural and emotional sentiments rather than for investment. But it is a precious metal and valued in the world of capital markets. And taking loans by pledging gold ornaments and jewellery is very common in India among all classes of people. Gold pledged should have a purity of a minimum of 18 karat and precious stones or other metal in ornament is not considered for evaluation. And the interest rates can be 8-20%. It has many advantages over other types of loans like
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Quick disbursements
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A short payback term of 6 months to two years
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Loan to Value ratio of up to 90% but based on gold quality it can be 65% too.
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Flexible repayment choices other than the traditional EMI, such as bullet repayment, upfront interest payment
Loan against Fixed Deposit
Always avoid breaking your Fixed Deposit (FD). You will not get interest and you may be charged a withdrawal penalty. It’s better to take a loan against your FD so that you continue to earn interest throughout the tenure. It is a common and safe option to opt for a loan against Fixed Deposit. Also, it is safe for lenders when the borrower defaults on the instalments. The loan granted will be around 85-95% of the bank FD value. The interest rates will be 1-2% higher than the interest you receive on FD. The repayment term is the same as the tenure of the FD that you have pledged.
Loan against Mutual Funds and Shares
Loans can be taken against bonds, mutual funds, insurance policies, shares and ETFs and this is called Loan against Securities. Shares and Mutual Funds are investments that have high-risk factors as they are market-linked assets. Hence lenders check the performance of the fund before approving the loan. As mutual funds are managed by professionals, they are of higher priority for lenders than the sole equities and shares. But all assets are assessed with the same rules. When in need of money your asset may not be performing well so it is not a good idea to redeem it. It is best to take a loan pledging your securities so that they keep earning interest /bonus or keep increasing value while you will get money by loan to fulfil your needs. The loan amount depends on the type of security pledged and the LTV ratio that the lender has assigned for that particular type of asset. The loan amount can range from 5lakhs to 5crores and the interest rate starts at 10%. A loan is approved only for borrowers with a good credit score and repayment tenure will be up to 3 years.
Loan against PPF
Public provident funds (PPF) is an investment which is tax saving and supported by the government of India. PPF has a higher ROI when compared to the FD. PPF withdrawn earlier is not a good decision so it is used to avail loan against it. The loan amount will be 25% of the PPF amount and charged at 2% higher than the PPF interest rate. Repayment tenure is usually 3 years and loan can be availed only after 6 years of opening PPF account.
Loan against Property
When your need for funds is big and you own some property, then you can avail loan against the property. The property you pledge can be residential, commercial or industrial. The loan amount will be 60-70% of the property’s market value and depend on the borrower’s eligibility and credit score. The interest rate for such loans will be minimum 9% per annum with repayment tenure ranging 10-20 years. Only one loan can be availed on one property and it should be free of any litigation or mortgage. Also, reverse mortgages can be opted for by elderly people.
Summing up
There are many lenders in the market and various ways to borrow money. The borrower should analyze all options and decide on the one that fits their requirement and fulfils the lender’s eligible criteria. Borrowers should be smart and know their conditions and should not overestimate their repayment capacity. If you repay your loan regularly then taking a loan against your asset is a smart option.
