In times of urgent requirement of funds, most people think of a personal loan as the only option. However, there are several types of other loans available in the market, which can be used to raise capital for various requirements.

Taking a personal loan though may sound pretty tempting as it is hassle free and unsecured. However, it is also the most expensive loan aside from borrowing cash on your credit card! Use your existing assets to generate funds in a smart way.

Types of Loans

Secured loans are those which can be availed against some kind of asset which is used as a collateral security by a lender to cater to the borrower’s inability to keep up the repayment commitments.

Such loans often come with lower interest rates. Unsecured loans are those which are given without any specific asset being mortgaged as security against the loan. Personal loans and credit card dues come under this category of loans and have higher interest rates. Additionally, the unsecured loans have higher processing fees and administrative charges.

Gold Loans

This is one of the best alternatives to a personal loan due to a variety of reasons. Firstly, the typical rates for gold loan are lower and are partially dependent on the value of gold given as security vis-à-vis the loan amount.

Higher the difference between these two figures, lower is the interest rate for the loan. Typically, if one avails a loan of about 80-90 per cent of the value of the gold deposited then rates would be around 12-15 per cent which is still competitive compared to personal loans. The other benefits of a gold loan are its faster processing time and negligible or no processing fees.

Getting loans against an existing insurance policy is yet another option which many people do not try when in need of money. One can avail loans against a policy depending upon its surrender value at that point of time.

One can get up to a maximum of about 90 per cent of the current surrender value of the policy provided the other criteria are met. The policy must be in force for at least 3 years and all premiums paid up regularly for availing a loan against it. In some cases this period may be a minimum of 5 years. The typical rates for such loans are about 9-10 per cent.

Loans against FDs

Fixed deposits too can be utilised to raise money. Banks generally provide loans against the fixed deposits that one has with them at typical rates which are 1-2 per cent higher than the rates being provided on that deposit.

This implies that if the bank was paying you 8 per cent on the FD, then the loan against the same FD will be at 9 or 10 per cent. Thus you need not ‘break’ the fixed deposit. The value of loan is about 75-80 per cent of the current value of the FD.

Loans against Property

Property, which is an immovable asset is one of the steadiest sources when it comes to raising capital. All banks and private lending institutions readily provide loans against property.

The interest rates, however, in this kind of loan are about 13-16 per cent which is close to a personal loan. One can get about 50 per cent to 60 per cent of the market value of the property as loan amount. However, banks do tend to undervalue the property when assessing it.

Getting valuation done by a third party will help you raise a higher amount against the same property.

Such loans are handier when one requires a larger sum and should be avoided for smaller amounts that are less than 5 lakh.

(The author is CEO, BankBazaar.com)

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