Loans against Securities: What are your Options?

Generally speaking, loans are classified as secured or unsecured. Secured loans are those that require the borrower to pledge an asset as collateral while unsecured loans are granted to customers without taking any guarantee but at a higher rate of interest. However, alternative means have been made available for individuals who wish to have their applications processed quicker whilst availing loans at interest rates that are far more attractive in comparison with conventional personal loan. Following are the five most popular loans against securities you can avail in India.

Loan against Gold: An increasing number of financial institutions and banks in India offer loans to customers who pledge their gold jewellery as guarantee. Processing of such a loan is usually done extremely quickly, ranging from a few hours to two-three days. The interest rate of the loan will depend upon the margin of safety left with the lender. For instance, if you require a loan worth Rs.5 lacs and pledge gold worth Rs.8 lacs, the margin left with the bank will be Rs.3 lacs, which is healthy enough for you to avail an attractive interest rate. However, taking loans that are around 80-90% of the worth of gold pledged will result in a higher interest rate.

Loan against Fixed Deposits: Individuals with long-term fixed deposits can avail loans against the investment instruments if they do not wish to break them. The amount of money you can get through such a loan is between 75% and 80% of the current value of your fixed deposit, and the interest rate applicable on the loan will be around 1% or 2% more than the rate accrued on the fixed deposit. For instance, if the current worth of your fixed deposit is Rs.8 lacs, and the interest accrued on it is 8%, you can avail around Rs.6.5 lacs at 12%.

Loan against Insurance Policies: Loans against insurance policies can only be taken if the policy has a surrender value. For a policy to accrue surrender value, premium payments must be done regularly for a period of at least three years. Once your policy has a surrender value, you may avail a loan to the extent of 90% of said value. For instance, if the annual premium on a LIC endowment policy is Rs.30,000, and you have made premium payments for 10 years (total of Rs.3 lacs), the surrender value of your policy will be around Rs.2 lacs, and you can avail a loan to a maximum of Rs.1.8 lacs. You may choose to avail the loan either from banks or LIC, and the policy will be pledged to the lender. If you are unable to repay the sum borrowed, you will have to surrender your policy so that the lender recoups the money you owe them.

Loan against PPF: PPF or Public Provident Funds can also be placed as collateral for a loan. However, certain restrictions mean that loans can only be availed from the third to the sixth year. Also, the amount of money you will receive will be no more than 25% of the amount remaining in your account two years back. For instance, if a loan is taken in the fifth year post opening a PPF account, the amount of money you will receive will be 25% of the balance in the third year. So if the balance was Rs.4 lacs in the third years, you will only be eligible for a loan worth Rs.1 lac.

Loans against Mutual Funds: Shares and mutual funds can also be pledged to avail loans. However, the shares and funds that can be used to take loans must be approved by the bank as the value of these instruments are very volatile, thus requiring a high level of margin. The amount of money you will actually receive from the loan will be significantly lower than the value of the shares you will pledge in return.

Loan against Property: Commercial and residential properties can be pledged as collateral to avail a loan. Most lenders sanction up to 50% of the property’s current market value, or 30 to 40 times the borrower’s monthly income. Depending upon the size of the loan, the interest rates can vary from 13% to 16%. Loans against property are ideal for major expenses such as weddings, expansion of business, etc.

These alternatives can prove effective in times of emergency as your application will be processed sooner than usual and the loan will be granted to you immediately provided you meet all eligibility criteria.