There are two types of personal loans- Secured and Unsecured. An unsecured loans usually comes with a higher rate of interest, as you do not need to pledge a security. On the other hand, a secured loan comes with a lower rate of interest and you have to pledge a security. This type of loan also comes with higher borrowing limit. You must be well versed with straightforward and objective driven loans like Home Loan and Car Loan, but there are some other secured loans like loan against insurance, mutual funds, shares and insurance that can come handy for any purposes.
Here is all you need to know about different types of assets to pledge and raise a loan against as per your needs.
Loan Against Shares
You are allowed to take this loan as an overdraft or demand loan against the eligible list of securities. This type of loan is very useful during urgent needs for any personal or business requirements, but it cannot be used for speculative purpose or inter corporate investments. You can fetch loan amount upto Rs. 20 lakh, but some banks do allow loan amount as high as Rs. 10 crore.
Loan Against Shares come with the twin benefit of keeping you invested in the equities and at the same time help you raise a loan during financial emergency. Your shares are freed from the bank once you repay the loan. Your loan amount will keep on fluctuating with the market volatility. In case the value of the share drops, the lender may ask you to raise the value of the security by pledging more shares or replenishing by putting requisite cash funds. You should weigh your needs before seeking loan against shares and consider opting it only for a short tenure.
Loans Against Mutual Funds
You can also avail a loan by pledging mutual funds, which are assets in your name. The loan amount that sanctioned is determined on the basis of the value of the MF units you hold and is about 60-70% of the value of the mutual fund units pledged at the time of applying for the loan. After this, a lien will be put on the mutual funds pledged by the lender. A lien gives lenders the right to recover the loan amount in case a borrower defaults. An investor cannot sell the mutual fund units after a lien is applied. The interest rate is determined at the time of application of the loan.
You can fetch a loan worth upto Rs. 20 lakh against equity funds and up to Rs. 5 crore against debt fund as per bank rules. Mutual funds that come in with a lock-in period like ELSS cannot be pledged for to get loan. Such loans are less volatile as compared to loans against shares. You can opt for this type of loan if the need is for short- or medium-term and the amount is not very high. However, it would be wise not to compromise on your investment just for the sake of discretionary purchases.
Loan Against Fixed Deposits
Mostly banks offer loans worth 80% to 95% of the value of your fixed deposit. These loans come with interest rates ranging from 1% to 2% above the underlying FD interest rate. The loan amount ranges from Rs. 25,000 to Rs. 5 crore or more depending on the bank’s norms. The repayment period for loan against FD is up to 5 years or as per the tenure of the underlying FD. Banks levy no processing charge for loans against fixed deposits. The interest rate is based on the underlying FD rate, so if you renew the FD in future and the interest rate rises, the rate of this loan will also go up simultaneously. This type of loan is helpful during sudden financial crunch as they are available quickly without much hassle.
Loan Against Insurance
You cannot take loan against all you insurance policy. You can avail this loan by assigning your eligible insurance policy in favour of the lender. Usually banks and insurance companies allow loan in the range of 60% to 90% of the surrender value of the insurance policy. You can apply for a loan against an insurance policy only if the policy has completed three years prior to the loan application. You cannot take a loan against a term policy or the ULIP. If the interest on the loan against insurance exceeds the surrender value of the loan, then the policyholder may no longer get the insurance cover from the assigned policy. If you have paid a large amount for the insurance policy, and you need low-cost fund for goals like fulfilling business needs or for arranging the down payment on your home, you can use loan against insurance.
(The writer is CEO, BankBazaar.com)