4 loans you can opt for to battle financial stress during COVID-19

The COVID-19 pandemic has led to salary cuts and job losses. If you are a salaried employee, there could be a shortage of money. It means digging into savings to manage the expenses. An emergency fund meets temporary income loss. For a more extended period, you may have to liquidate investments. A loan can be a better option to survive this crisis.

Here is a list of loans which help you battle financial problems. 

1. Loan against FD

You can pledge the fixed deposit or FD at the bank and get a loan against it. You don’t have to make a premature withdrawal and continue to earn interest on the fixed deposit. The size of the loan can go up to 95% of the deposit. Banks charge an interest rate of 1%-2% higher than the interest paid by the bank on the fixed deposit. 

Banks sanction the loan against the value of the fixed deposit. Suppose that the bank has set a limit at 90% of the amount of the fixed deposit. You can take a loan of Rs 90,000 on a deposit of a lakh. Repayment extends up to the tenure of the fixed deposit. 

How to avail a loan against FD?

You may apply for a loan against the fixed deposit online or visit the bank branch. Don’t forget to submit the original FD bank receipt and fill the application form. Many banks allow you to take a loan starting 90 days from the date of the deposit. You can repay the amount as a lump sum or EMIs before the maturity date of the fixed deposit.

Advantages of a loan against FD

• You don’t have to break the FD.
• The interest rates are lower than a personal loan.
• Many banks don’t charge processing fees.
• There is no CIBIL score check with the fixed deposit serving as collateral.

Disadvantages of a loan against FD

• The loan tenure must not exceed the residual tenure of the FD.
• You can’t close the fixed deposit until the repayment.
• The bank closes the fixed deposit and claims the dues on non-repayment.
• The maximum loan size depends on the value of the fixed deposit.

2. Gold Loan

The high gold prices are a boon to several borrowers looking at gold loans for solace in these troubled times. You can pledge gold jewellery, ornaments, bars or coins with a bank and get money against it. NBFCs offer gold loans only against gold jewellery. The loan is sanctioned depending on the market value of the gold and must have a purity of 18-24 carats. You get the gold back, after repaying the borrowed money and interest within the chosen tenure. 

The RBI has made an announcement which will enable lenders to give a higher amount against gold ornaments. The loan-to-value ratio, commonly used by lenders to evaluate collateral, has gone up from 75% to 90% on bank loans against gold ornaments for non-agricultural purposes. This relaxation is available up to March 31, 2020. 

The interest rate generally ranges from 8%-18% a year. The maximum time for repayment is around 12-36 months. You can opt for bullet repayments if the tenure is less than six months. You can repay the principal and the interest at the end of the term in a single shot. The repayment can also happen through the regular EMIs and is suitable for a longer tenure. Banks may offer gold loans up to a crore, and some NBFCs have no upper limit. 

How to avail a gold loan?

You can visit the nearest bank branch with the gold and Know Your Customer (KYC) documents which are the PAN card, identity proof and a passport size photograph. The bank checks the purity and weight of the gold to fix the disbursal amount. The interest rate depends on the bank. 

You may opt for the door-step evaluation of gold where a bank executive visits the house and evaluates the gold jewellery on the spot. The bank transfers the loan amount to your bank account. 

Advantages of a gold loan

• You can pledge the gold coins and jewellery lying idle and take a loan at any time.
• The same gold asset can be the collateral after repayment.
• Banks don’t check the credit score when sanctioning the loan.
• The increase in gold prices and a higher loan-to-value ratio gets more money.

Disadvantages of a gold loan 

• The non repaying leads to an auction of the gold.
• Defaulting affects your credit score.
• You could request the lender for an extension, but with a penalty.
• Lenders could charge processing fees, valuation charges and other additional fees.

3. Loan against life insurance plan

You can avail a loan against a traditional life insurance plan which includes endowment policy, whole life insurance, money-back plan and not term life insurance policies. The insurance policy is the collateral placed with an insurance company or a bank. You must pay the premiums for a minimum of three years, before taking a loan against the plan. 

The loan depends on the surrender value, which is a portion of the money paid in premiums. It is equal to 80%-90% of the surrender value in life insurance plans with guaranteed returns. You must continue paying the premiums along with the principal and the interest on the loan. If you are paying only the interest portion, the lender deducts the principal amount from the sum assured during the claim settlement. 

The interest rates fall in the range of 9-12% a year. Repayment must be within the term of the policy. You can take a loan against unit-linked insurance policies, which depend on the type of fund and the amount of the corpus. 

Also Read: 5 Factors About COVID-19 Personal Loans You Should Know

How to get a loan against the life insurance plan?

You must check with the bank or the insurance company before taking a loan against the plan. Fill the application form and submit the original life insurance policy documents. Assign the insurance policy to the bank or the insurance company in the prescribed format by signing a deed of assignment. The lender endorses the assignment details on the policy document. 

Advantages of a loan against life insurance plan

• You get instant approval on the surrender value of the policy.
• The interest rates are lower than a personal loan.
• Banks don’t consider the credit score when sanctioning the loan.
• It requires minimum paperwork.

Disadvantages of a loan against life insurance plan

• There is a waiting period of three years.
• You cannot take a loan against a term insurance plan.
• You must pay both the premiums on the policy and interest on the loan.
• If you default, the lender recovers the dues from the surrender value.

4. Loan against a mutual fund

The loan is against the equity, debt and hybrid mutual fund units. Banks charge an interest rate of 10-11% a year depending on the tenure, with a cap on the loan amount.

The lenders have a list of approved mutual funds against which they lend. You must grant the bank the ownership of the units. The loan amount is close to 50% of the net asset value for an equity fund and 80% for a debt fund. 

You get the loan through an overdraft facility, with interest charged only on the borrowed amount. There is no tenure for the overdraft facility. 

How to take a loan against mutual funds?

Approach the bank to pledge the mutual fund units. You must fill an application form to mark the lien, giving the scheme name, folio number and the number of units. The document giving the bank the right to hold or sell the fund is the lien. 

The bank asks the mutual fund registrar to mark the lien on the pledged units. The registrar sends a copy to both the bank and the borrower, confirming the same. You cannot redeem units until the final repayment.

The bank opens a current account with the overdraft facility. You may borrow up to the set limit, based on the value of the units offered as collateral. The bank charges interest only on the borrowed amount. You have flexible repayment of interest-only EMIs, with the principal paid back at the end of the tenure. 

Advantages of a loan against mutual fund

• You don’t have to sell mutual fund units with ownership remaining intact.
• It is an excellent way of raising capital against idle mutual funds.
• You can pledge the mutual fund units online or offline and get a loan at low-interest rates.
• The entire process has minimal documentation and quick approvals.

Disadvantages of a loan against mutual fund

• The facility is only against mutual funds approved by the bank.
• Banks charge fees for pledging and de-pledging the mutual fund units.
• If you default on repayments, the bank redeems the units and recovers the dues.
• The interest rate offered by the banks depends on the credit score.

You must be getting a lot of enquiries from banks asking you to take a personal loan. Look at cheaper options instead of paying high interest in these hard times.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in