Covid-19: Look for cheap loan options to raise cash as banks turn cautious

Go for secured credit options and make the most of assets like gold, house, car

With job losses, pay cuts and business failures, especially in the micro, small and medium enterprises becoming a norm in the wake of Covid 19 pandemic, many people will be looking to raise funds. However, banks, on their part, are becoming more cautious while sanctioning uncollateralised loans. In such circumstances, it is best to look at instruments that can provide you with immediate liquidity without much hassle, and more importantly, at a low cost.

Loan against fixed deposits:

Adhil Shetty, CEO, BankBazaar, says: “Most banks offer loans against fixed deposits (FDs). Since you provide collateral to the bank, it extends credit even if you do not have a credit score.” Being secured instruments, banks lend around 80-95 per cent of the FD amount. The loan rates are usually 1-2 per cent over and above the FD rates. 

Raj Khosla, founder, MyMoneyMantra, says: “Check if it makes sense to encash the FD or take a loan against it, and the premature withdrawal charges. Use this loan, If you need money for a long term, else encash the FD.” Banks typically levy no processing charge for such loans with their amount starting from Rs 25,000 onwards. Gopal Bohra, partner, NA Shah Associates, adds: “Take a loan against the FD for a temporary need, that way you continue with a higher interest rate of 8-9 per cent.” Remember that your repayment record matters, for eligibility. 

Shetty says: “If you have too many defaults or have been tardy in repaying your other loans, then the lender may charge a much higher interest rate on the loan, giving you a much smaller loan to value, or both.”

Loan against gold ( LAG): 

Khosla says: “LAG is a slightly emotional issue, and not the cheapest loan.” However, this seems to be a preferred alternative for many as you can get the funds within a few hours. You can get LAG up to Rs 25 lakh. Your monthly outflow will be much lesser with this loan, as it allows you to pay only interest as EMI and principal later, making it affordable during hard times.

 

Home loan top-up: 

This is an additional amount that a bank sanctions for you against your house. You can get a top-up loan, only if you have a home loan running with a lender. It comes with a term of almost ten years, and you pay an interest rate 1-2 per cent higher than that on your existing home loan, after the lender assesses your creditworthiness. Khosla says: “I would recommend a home loan balance transfer top-up, for getting lower rates as well as extra cash.” This option works well for a long-term need. Bohra says: “You can also claim tax benefit on the top-up loan, provided you have taken it for renovation of the house.”

Loan against your car: 

If you have no other asset left, borrow against your car. You get an instant top-up on your existing car loan of up to 150 per cent of its value if you have a clear payment record for a minimum of nine months. It’s a paper-less process, and you get instant funds. 

Khosla says: “The interest is high around 15 per cent, and you should take it only for a short-term need.” Individuals, self-employed and HUF can avail this loan.

Other options:

There are other loans against securities as well out there, like those against insurance policies, mutual funds, Demat shares, NCDs, National Savings Certificates etc. Shetty says: “Loans against securities are best to tide over short-term immediate financial emergencies only. Bear in mind that you are pledging your investments here.” 

Raise funds against your investments in FDs and small savings options, before moving to shares, mutual funds and insurance. Shetty says: “If the interest on the loan against insurance exceeds the surrender value of the loan, then you may no longer get the insurance cover from the assigned policy. So this should be the last attempt.”