Why borrow money from friends and family when you have these 6 options?
It is not uncommon to find yourself in the middle of a serious financial crisis. Think of it as one of life’s hurdles that you may have to overcome one day. But the question is: are you prepared enough to face such a situation? Of course, one option is to borrow money from your family or friends (sometimes the first option for many of us), but there are other options that you can also consider. Borrowing from friends and family can put a strain on their finances, while it can put long-term relationships at risk if the money is not paid back on time. Hence, you can sign up for any of them on a wide variety of credit channels in the market to meet your immediate capital needs. However, you need to make some effort to clearly understand how each of these credit tools work and what to consider to avoid any unpleasant surprises later.
Here are some of the loan tools you can opt for to help get rid of your financial crisis.
1. Personal loan
Personal loans are one of the most popular loan instruments out there and are usually unsecured loans that meet your immediate financial needs. The application process is simple and straightforward and the loan is usually paid out within 7 working days. You can take out a personal loan from 25,000 rupees (depending on your monthly income and repayment ability) for a period of up to 5 years. The interest rate usually varies between 11.50% pa and 16% pa, depending on the chosen lender. There is also a processing fee, which is usually 2% of the loan amount.
Keep in mind:
You have to repay the loan in monthly installments. So should you default, not only will you face a fine, but your creditworthiness will likely take a blow as well. Apart from that, NBFCs (Non-Banking Financial Institutions) offer minimal documentation and quick loan disbursement compared to banks, but the interest rate is often higher. Also, if you have a low credit score, lenders may shy away from lending you a loan or placing higher interest rates on your loan. Remember, lenders take your repayment ability and monthly income into account when deciding on the final loan amount. It can happen that you do not receive the desired amount due to past borrowings.
2. Payday Loans
Payday loans or microloans are designed to take care of your money crisis at the end of the month. The repayment period is usually between 1 and 3 months. You can get a loan anywhere between Rs.1,500 and Rs.1 lakh with payday loans. The application process is also easy. Some lenders also offer a flexible line of credit, which means that you can get a certain amount and withdraw the amount as you wish. You can close the line of credit once your condition is met. To apply for a payday loan, you need to download the lender’s app, register, fill out an application form and upload the required KYC documents. Upon completion, you will receive an OTP for authentication. If all goes well, the amount can be paid out within an hour.
Keep in mind:
Payday loans require higher interest rates that usually vary between 0.8% and 2% per day. The processing fee can be up to 2% of the loan amount and add up to the total cost of the loan. In addition, in the event of default in payment, the lender can charge an interest rate of 4% as the default interest rate. So only opt for a payday loan if you are okay with relatively high interest rates and have a clear repayment schedule.
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3. Credit card linked, pre-approved loan
This loan is linked to your credit card and has a predefined maximum amount. Once the loan is paid off, the EMI will be added to your monthly credit card bills. Minimal documentation and quick payouts make this type of loan a preferred option for many.
Keep in mind:
Not everyone except those considered preferred customers by lenders are eligible for such loans. Various factors such as your repayment history and credit rating are considered before the loan is approved. In addition, the upper limit is usually tied to the credit limit of your credit card account. That said, there is a pre-defined threshold above which you cannot borrow any loans, and your credit limit will be locked in the amount of your outstanding loan amount so that you cannot use your card for other regular expenses. In addition, the interest rate varies between 12% and 29% pa
4. Gold credit
Most banks and NBFCs offer loans for gold. The loans are one of the fastest and easiest ways to get funds. The interest rate is also not that high at 12% to 16% pa. Minimal documentation and quick payouts are some of the most important features of gold loans. Since it is a secured loan, most lenders do not have a minimum income or exemplary creditworthiness as criteria.
Keep in mind:
For gold loans, the loan amount is determined on the basis of the loan-to-value (LTV) ratio. You can receive a maximum of 80% of the value of the pledged gold. Also, in the event of a default, you could lose the collateral to the lender, in this case your pledged gold.
5. Loans against insurance policy
An insurance policy loan is a secured loan where the lender holds your insurance policy as a security against the loan amount. Since this is a secured loan, lenders don’t care about your creditworthiness or annual income. This credit instrument allows you to obtain a loan of 60% to 90% of the surrender value of the policy. Fast payouts and relatively low interest rates of 9.25% to 13% pa are some of the main highlights of this type of loan instrument.
Keep in mind:
Banks and insurance companies only offer such loans against traditional unaffiliated endowment insurance and not against term policies or ULIPs. In addition, one must pay the premiums for at least 3 years before applying for such a loan. As with all secured loans, if you fail to repay, the lender has the right to liquidate your policy to reclaim the amount. This means that you no longer have your policy. So only sign up for loans against policies when you have no other option, as this could jeopardize your financial future.
6. Fixed-term loans
In addition to expanding your investment portfolio, FDs can also serve as a credit channel. With this option, you can obtain a loan of up to 90% of the value of your fixed-term deposit. Another benefit is that the interest rate is in the lower range, usually 1% above the FD rate offered to you. Minimal documentation, no CIBIL score check, and no processing fee are some of the other features of loans against FDs.
Keep in mind:
If you fail to repay the amount, the relevant lender will liquidate your FD to reclaim the amount. That is, all of the returns that you could have enjoyed are no longer available to you. Consider this factor before signing up for a loan against your FD account.
What to consider before borrowing
There are tons of credit channels out there that can help you out in times of financial crisis, and with proper documentation and a stable income, getting a loan isn’t that difficult either. However, responsibility is put to the test at the time you repay your loan. Therefore, consider the following guidelines before applying for a loan.
# Borrow only the amount you need
# Don’t borrow just because you get an offer
# Compare the interest rates and look for the best deals
# Check your creditworthiness before applying for an unsecured loan product
# Use an EMI calculator to see how much is going into your monthly payments
# Make sure you are financially stable enough to repay the loan
To sum up, while credit instruments can be used to help out with a lack of money, the undeniable fact remains that they involve paying interest fees and pledging your assets like gold and insurance plans / FDs as collateral in case you opt for a secured financing facility . Therefore, it is always better to have an adequate emergency fund (equivalent to at least 6 months of your spending) and comprehensive health insurance to minimize your credit dependency in times of crisis.
(The author is the CEO of BankBazaar.com)