LoanRaja Blog- Personal Finance Guide

If you are an individual waiting on the sidelines for good news on the interest rate front, this article is apt for you. The good news has been pouring in on the interest rate front with repeated cuts in repo rate and cash reserve ratio. If you are wondering how this is going to affect you, below is the answer.

Unforeseen circumstances can land anyone in a financial crisis. Sudden loss of job, divorce, a serious accident, a major surgery or death of a dear one create need for urgent cash for which we may not be prepared. There may arise an opportunity for a foreign travel for which you don’t have immediate cash. How to find the required amount in the shortest possible time is a difficult choice to make. Do you want funds readily available to you whenever you need or desire? Personal loan is the answer. It is an any-purpose, no-questions-asked loan given by most banks and NBFCs. Interest rate is high as it is unsecured loan.

In case you have a little more time at your disposal you can explore the possibility of a Loan Against Property (LAP). If you own a valuable asset like a house or commercial property you can raise a loan against it. It is much cheaper than a personal loan as it is secured loan. But processing and documentation will take more time. First the lending bank has to get the property valued and has to be convinced about the repaying ability of the borrower. The loan is given as a certain percentage of the property’s market value (around 40 -60 per cent). Lending institutions have different threshold limits for Loan Against Property.

Tenure

Such a loan is usually available for a five-year period. LAP will have a longer tenure than a personal loan, usually a maximum of 10 years. The advantage of personal loan is that it requires less paper work and is sanctioned sometimes within three days. But the lender has to be convinced on your ability to repay the loan. Nobody is going to give you a personal loan of Rs.1 crore. The only way to get a loan for such an amount is to mortgage a property valued around Rs.1.75 cr. One can get personal loans from Rs.24,000 to ten lakhs. The threshold limit for loan against property is much higher.

Eligibility

Eligibility norms and documentation for personal loans and LAP slightly differ. While a customer seeking a personal loan must have a net monthly salary of at least Rs.7,000, a person seeking LAP must have a net monthly salary of at least Rs.12,000. Age requirement is 21-60 years in the case of salaried and for self-employed it is 21-65 years. It is same for personal loan and LAP. For both the loans identity proof, residence proof and income proof have to be furnished. Salaried individuals have to submit their latest salary slip, Form 16 and bank statement for the last 3 months.

Self-employed customers have to furnish copies of their IT returns for the last 2 years, balance sheet, and profit & loss account, bank statements for the last 6 months. For loan against property, photocopies of all documents related to property have to be handed over before approval of the loan. A valuation report of the property from the professional valuer appointed by the bank is a must. Some banks insist on the borrower to give an undertaking that the loan won’t be used for any purpose other than what is mentioned in the loan agreement. This is to avoid diversion of loan for speculation.

A borrower has to submit three additional documents apart from what is required for a normal housing loan. Copies of all the property documents have to be handed over before approval of the loan. Borrower has to give a declaration stating that the loan amount would not be used for any other purposes. A valuation report of the property from the professional valuer appointed by the bank is a must. Identity proof and proof of residence along with income proof has to be provided. Salaried individuals have to submit their latest salary slip, Form 16 (along with salary certificate from the employer), and bank statement for the last 3 months. Self-employed people have to furnish copies of their IT returns for the last 2 years, balance sheet, and profit & loss account, bank statements for the last 6 months.

LAP allows you to keep your property and have liquid funds. It is the cheapest retail loan after housing loan. Fixed rate loans are rare now as banks find floating rate more profitable. It is 30-40 percent cheaper than personal loan. Entrepreneurs find LAP an ideal source for funds for business expansion. Many borrowers land in debt trap after availing personal loans, which attract stiff penal interest in case of delayed payments. Failure to read the fine print can push a borrower deeper into debt.

Everyone deals with having to wriggle out of a financial crisis at some point. If you have meticulously planned your finances and investments a temporary cash crunch may be easier to deal with. But very often we fail to do so although financial experts have been giving us this sound advice for many generations now. There may be many reasons for not being ready for such a situation either because you don’t realize it could happen to you, you simply because you can’t afford it, you spent your savings on higher education or your funds are all locked on long-term investments.

When you are suddenly hit by a financial road block the first thing to remember is – DON’T PANIC! Misfortunes hit everybody — whether it’s losing a job, an illness or just an unexpected expenditure. You still have several avenues you can explore including sounding out friends and relatives to help you tide over the situation. If that’s not the most comfortable option for you many companies offer employees personal loans at subsidized interest rates. You could check with your company to see if they offer such a facility. The biggest advantage would be that it will be hassle free when compared to a bank loan. Some other options available to you are listed below:

Bank Overdraft

Your bank may be willing to offer you an overdraft facility which will allow you access to cash in no time. A bank overdraft is relatively cheap and there is no paperwork involved in this. You can also apply for a loan or overdraft using you insurance policies, mutual funds, national saving certificates or government bonds, shares, securities etc. A loan against securities are much cheaper than personal loans and the borrowing limit may differ but is usually in the range of 60-65 percent of the values of these securities.

Loan Against Property

Offering a collateral is the best means to get a loan in an emergency as this gives the lender some security and can take care of the lender’s risk. This may also allow you to get the secured loan at a substantially lower interest rate than you would have gotten a secured loan for. If you are taking a loan against property the downside is that processing may take longer. If you need urgent cash, a loan against gold or car would probably be processed faster than a loan against property.

Personal loans

Personal loans are growing in popularity as a source of immediate cash. Although interest rates on personal loans are on the higher side many banks can sanction personal loans in less than a week. Personal loans offer consumers easy access to funds without the need to provide any security and if you already have an account with the bank it may be much easier for you to get a personal loan.

Credit card

Credit cards come in handy in a crisis situation and allow you to withdraw cash from ATMs. A credit card will usually have a cash withdrawal limit and interest charged on cash would also be different from what is levied for card usage. But if you need instant cash with no processing time, this is definitely the best option.

Moneylenders

The neighbourhood moneylender provides you money in an emergency without fuss. But you should resort to this as the last option after exhausting all other avenues. Interest rates of 50-60 percent annually are common with private moneylenders and they may take advantage of your desperation by charging hefty interest rates.