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7 alternatives to expensive personal loans

For cash emergencies, personal loans are an easy and fast option. However, it could prove to be quite expensive on the pocket, with interest rates ranging between 15 per cent to 25 per cent.

Further, banks follow stringent evaluation of the borrower's financial profile.

So are personal loans the only option for urgent cash requirements? Investment Yogi brings to you a quick guide to other alternatives a borrower can choose from.

1) Loan against gold

This loan provides instant liquidity by pledging one's gold jewellery without having to sell them.

Eligibility: Available for only the gold component in the jewellery. No value will be considered for gems, stones, platinum or other metal in the jewellery.

Documents required: Proof of address and identity.

Interest rate: Between 10 per cent to 17 per cent, and is calculated on the basis of reducing balance.

Interest is based on how much margin of safety you are willing to leave with the lender. The more jewellery pledged, lower the interest rate.

Processing time: One working day.

Other features: Amount depends on the net weight and purity of the gold. Prepayment possible at nominal charges. Gold loans do not require regular EMI payments.

Key advantage: Easily available irrespective of borrower's credit history, with minimal documentation.

2) Loan against property

This loan could be obtained by pledging a residential or commercial property. Land is not accepted under this facility.

Eligibility: Property should have no outstanding ownership dispute and should not be mortgaged. An income criterion between Rs 1 lakh to Rs 2 lakh is mandated by many banks.

Documents required: Proofs of identity, residence, signature, age, and income, property documents, and bank statements.

Interest rate: Between 13 per cent and 16 per cent.

Processing time: 10 to 15 days, depending on your lender. Loan disbursed after valuation of documents and property.

Other features: Partial pre-closure is generally available without any penalties. Refinancing option to increase loan amount, is offered if the value of the property has risen over a period of time.

Key advantage: Loan amount primarily based on value of the property and borrower's income.

3) Loan against National Savings Certificate and Kisan Vikas Patra

An overdraft facility or a term loan is offered on the face value of a National Savings Certificate (NSC) or a Kisan Vikas Patra (KVP).

Eligibility: Applicants must have certificate in their own name.

Documents required: Proofs of residence and income, NSC or KVP document certificate.

Interest rate: 4 per cent over banks' base rate, or 5 per cent over NSC or KVP rate, whichever is higher.

Processing time: 1 to 2 days.

Other features: Loan to be liquidated within the tenure of the certificate. If it is a term loan, repayments are in the form of equated monthly installments.

Key advantage: 75 per cent to 100 per cent (for certificates more than 3 years) of the face value could be sanctioned.

4) Loan against fixed deposits

One of the quickest and easiest loans, banks grant an overdraft against fixed deposits held with them.

Eligibility: Fixed deposit of minimum one year.

Documents required: Fixed deposit receipt.

Interest rate: 1 per cent to 2 per cent more than the fixed deposit rate. Interest is calculated only on the amount overdrawn.

Processing time: 2 to 3 days.

Other features: Banks open an overdraft current account for the sanctioned amount to be drawn. The repayment needs to be made within the FD tenure.

Key advantage: Overdraft of almost 80 per cent of the deposit value. Minimal documentation.

5) Loan against shares

Loan extended against shares of companies and units of reputed open-ended mutual funds.

Eligibility: Only individuals are eligible. Hindu Undivided Families (HUFs), companies, partnerships, sole proprietors, minors and trusts are generally excluded. Shares need to be fully paid-up. Loans are granted only on the bank's approved list of shares.

Documents required: Proofs of identity, signature and address, transfer deeds, demat pledge forms, and power of attorney. Some banks require the borrower to transfer the shares in the name of the bank.

Interest rate: Between 13  per cent to 16  per cent

Processing time: 7 to 15 working days.

Other features: Loan amount depends on the valuation of the security, applicable margin, ability to service and repay the loan, as applicable from time to time.

Key advantage: Liquidity without having to sell the shares, invested for the long term.

6) Loan against life insurance policies

Loans granted on unencumbered life insurance policies have low interest rates and easy repayment options.

Eligibility: Sanctioned on endowment plans, after the completion of three years of full premium payment. Term plans and ULIPs are excluded. But a few lenders sometimes do consider ULIPs. Minimum loan tenure is 6 months.

Documents required: Original policy document.

Interest rate: Around 8 to 9 per cent. In case the outstanding loan and unpaid interest become equal to the surrendered value, the policy is foreclosed.

Processing time: 2 days.

Other features: Maximum loan amount is dependent on the surrender value of the policy. The loan may be repaid at any time during the policy term. In the event of a claim, the outstanding loan amount and the interest are deducted from the claim proceeds.

Key advantage: Quick with minimal documentation.

7) Loan against Public Provident Fund (PPF)

A loan can be taken against one's PPF but only for a maximum tenure of 24 months.

Eligibility: Available from the third to the sixth year, up to 25 per cent of the balance at the end of the 2nd year.

Documents required: PPF passbook.

Interest rate: 2 per cent above the PPF rate of interest.

Processing time: 1 to 2 working days

Other features: Once the first loan is repaid, a second loan could be obtained, if the borrower is within 3 to 6 years of opening the account.

Key advantage: Minimal documentation and continued benefits of the PPF account.                

A final word...

Investments not only fetch valuable returns, but they also play multiple roles of financial protection and tax saving. Work out the option that suits you best.

If your cash requirement is urgent and only for a short term, it is wise to opt for a loan against these, rather than liquidate them at penal interests or lose out on its benefits.