Alternatives to a personal loan

Unsecured loans are expensive. However,if there is paucity of funds,explore other options before considering personal loans...

Written by ITrust Financial Advisors | Published: July 19, 2010 3:46:39 am

A personal loan can address your urgent need for money,but did you know that there might be better alternatives to source funds on better terms. Here is a ready reckoner:

Borrow from family,relatives or friends: In case of need,the first option you should consider is to borrow money from someone in the family. This is one of the safest ways as there is a possibility of securing a loan on more generous terms than a bank.

Banks might charge you a hefty interest rate and in case you return the borrowed sum earlier than promised,you will not have to pay any sort of foreclosure charges. However,there are certain things that need to be kept in mind when you are borrowing from family:

In case of a large sum,get a written transaction to avoid any complications later,especially if you are borrowing from friends.

Have witnesses at the time of borrowing the money

Make sure you repay from time to time to signal that you are taking your obligations seriously

Loan against property (LAP): If you own a house,you can use it as collateral to get a loan. The sole benefit of taking an LAP compared with a personal loan is availability of funds at lower interest rates. According to the present interest rate scenario,interest rate on LAP could range from 12 per cent to 14 per cent compared with up to 24 per cent paid for a personal loan (rates as of May 2010).

Loan against investments: Another safe option is to cash out your investments in shares,gold or mutual funds. In such a scenario,it is not necessary to liquidate the investments to arrange for cash. You can avail a loan on such investments. Some potential options are:

Loan against public provident fund: You can avail of a loan against your PPF investment from the third to the sixth year. Loan is available up to a maximum of 25 per cent of the balance in your account at the end of the second preceding financial year. If you repay the loan in 36 months,interest will be charged at 12 per cent. Otherwise,interest will be charged on the outstanding sum at 6 per month. A second loan can be obtained before the end of the sixth financial year if the first one is fully repaid.

Overdraft against fd: You can use the fixed deposits by taking an overdraft against it rather than breaking it. You can get loan of almost 80 per cent to 85 per cent of the deposit amount. The interest rate in this case is typically higher than the deposit rate by 1 per cent to 2 per cent. The repayment needs to be made within the time period for which you have the fixed deposit.

Loan against securities: You can use your investment in shares or mutual funds as security to immediately receive a loan or an overdraft facility to meet your financial needs. This way you will not have to sell your shares or redeem funds in case you have invested for a long-term. The tenure for such loans varies from lender to lender. Typically,the overdraft limit is around 50 per cent of the value of the securities used as collateral. The rate of interest on such loans ranges from 13 per cent to 16 per cent. There are no foreclosure charges on such loans.

Loan from employer: Some employers offer a loan and adjust the repayments with the salary of the borrower. Another option that you may have is to request for advance salary from your employer so that you can address the financial requirement. Check with your employer if this facility might be available to you.

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