Ways and means of borrowing and associated costs in the formal sector:
Emergencies can hit ones working life anytime. Financial emergencies, on the other hand can hit any time owing to a sudden hospitalization, a natural calamity or some other reasons.
While financial planners say one must have an emergency fund equal to 3-6 months expenses in place, not everyone follows this rule diligently. In times like these, when on is most underprepared we have been hit by a severe lockdown owing to the ongoing crisis.
There are a few ways one can get money in a pinch, depending on how urgently you want the funds. The key things that will determine where you get the money from are how urgently you want the funds, the tenure of the loan, the interest and how expensive will it be to source the funds.
So, where do one get funds or cash instantly to tide over a financial disaster?
Before you opt to borrow money, be sure that it is really needed. Even then, borrow as little as possible. Remember, all borrowings have to be repaid.
Non-payment could lead to higher interest payments hence leading one to a debt trap.
Here is an outline of the sources one can tap into to raise much needed funds.
1. CASH WITHDRAWAL ON A CREDIT CARD
A credit card can be used to withdraw money from an ATM, the amount being equivalent to 40-80% of ones card limit. However, there might be a cap on daily cash withdrawal.
Most banks will allow one to over-extend ones limit on a case to-case basis. Be ready to cough up an over-limit fee over and above the usual interest rate on cash advance.
Upside: Instant cash, available anywhere, anytime.
Downside: A transaction fee of 2.5-3%.
Interest is levied on the money from the day it is withdrawn until settlement of the credit card dues in full.
Interest rate: 24-40 % per year.
2. TOP-UP LOAN
Already have a home loan? If yes, one can use it to get a top-up loan of up to Rs 50 lakh for a maximum of 20 years or till the balance tenure of your original home.
This option works if one has repaid the original home loan for some years as the combined value of the home loan and the top-up cannot exceed 75% of the value of the house.
Interest rate: 9-13% per year.
Upside: Quick processing.
3. PERSONAL LOAN
A quick option to get a loan within 30 minutes to three days, depending on ones relationship with the bank. In case of Personal Loan top up rate of Interest is 11% onwards.
In fact, one might already have a preapproved loan in ones name from ones bank which will make the process faster.
Upside: Quick disbursement if one borrows from ones known banking source.
Downside: High interest rate and processing fee of 2-3%. One will also have to pay GST on EMIs. For prepayment, a foreclosure fee of 2.5% of the outstanding amount is charged.
4. LOAN AGAINST PROPERTY
If one wants a larger loan and owns a house, one could take a loan against property. The entitlement can be between Rs 5 lakh to Rs 10 crore, depending upon the market value of the property.
The loan tenure varies between 2 and 15 years. Both residential and commercial properties can be used as collateral. Banks could lend one up to 65% of the value of ones property.
However, the house must be insured. Processing fee is 1.50 -2.00 % while prepayment charges are 2-3% of the outstanding. Interest rate: 9.50 - 13% per year.
Upside: Lower interest rates, larger loans.
Downside: Longer process of 3-10 days to get the loan.
5. LOAN AGAINST SECURITIES / Deposits / Insurance policies / PPF
One can pledge ones shares, mutual funds, FDs and insurance policies as collateral. In case of mutual funds and shares, banks will loan one the funds equal to 50% of to be pledged value, while they will offer one up to 75% of a fixed deposit (FD). The funds are transferred into a current account from which one can access them.
On a traditional insurance policy about 50% of the premiums paid can be borrowed where only interest is to be serviced. The final maturity shall be used to adjust against the loan borrowed and the principal outstanding. On a PPF, withdrawal to an extent of 25% of the 4th year balance is possible.
Interest rate: 9.5%-15% per year.
Upside: Quick disbursement, lower interest charges.
Downside: If portfolio value declines, one will have to put in the differential or pledge more funds/shares.
6. LOAN AGAINST PHYSICAL GOLD
One can get 60% of the value of your gold and can borrow from Rs 10,000 to Rs 25 lakh. The tenure is usually 6 months or 12 months, but one can renew the loan at a nominal charge.
While one can repay part of the loan whenever you want, gold you have pledged as collateral is released only after you repay the entire loan.
Interest rate: 9.15%-17.00% per year from banks while it is 12%-26% per year from Non-Banking Financial Companies (NBFC’s).
Upside: one can get funds within a day.
Downside: Gold appraisal charges vary between Rs 250-2,500.
If one is unable to repay loan, one will lose the pledged gold.
Hope you enjoyed reading this edition.
The views of the authors/publishers should not be construed as advice. Investors must make their own investment decisions based on their specific investment objectives and financial positions and using qualified advisors as may be necessary. Opinions expressed in various articles are not necessarily those of Wealthmax Enterprises Management Private Limited(WEMPL) or any of its directors, officers, employees and personnel. Consequently, WEMPL or any of its directors, officers, employees and personnel do not accept any responsibility for the editorial content or its accuracy, completeness or reliability and hereby disclaim any liability with regard to the same. Stock picks and mutual fund snapshots are not exhaustive and should not be construed as recommendations.