Last Updated on Mar 15, 2022 by Sankeeth Sunny

Financial literacy is not much spoken about in a country like India. Because of this, many individuals often end up making decisions that are unsuitable for them. One such instance is seeking a personal loan from a bank. Although personal loans have a few benefits like quick processing, flexible payment duration, no collateral, and so on, the cons are high too. Personal loan borrowers are often subjected to exorbitant interest rates, high processing fees, and strict eligibility criteria. 

People usually take personal loans for a wide range of instances like emergencies, wedding expenses, purchases of appliances, etc. But personal loan is not the only solution. There are quite a few other options that you can explore.

Check them below.

This article covers:

Loan against fixed deposits

Most banks offer loans against an individual’s fixed deposit in the form of an overdraft at a rate of 1-3% higher than the FD’s interest rate. The loan is typically given for about 70-90% of the FD’s value. This allows individuals not to break their FD before its maturity date while allowing them to borrow at decent interest rates. 

Advantages

  • Low-interest rates.
  • Easy and quick documentation process as the bank already has the necessary details and documents.
  • FD does not have to be broken prematurely.
  • No additional processing fees.

Disadvantages

In the event that you are unable to pay back your loan, the bank has the right to use the FD to settle the debt. This could create a dent in your savings. Other disadvantages are:

  • You cannot have a tenure longer than that of your FD to pay back the loan
  • Breaking the FD might be a better option in some cases
  • No tax benefits

Credit cards

Credit cards are an excellent source of short-term loans as they have no interest rate if the loan is paid back promptly. The interest-free duration lasts for around 45-60 days. Most banks issue credit cards at a nominal annual fee. 

Advantages

  • Easily accessible credit.
  • Zero-interest rates when loans taken are paid back in time.
  • Loans can be paid back using EMIs.
  • Timely payment of dues helps build credit score.

Disadvantages

  • Many users misunderstand the minimum due amount as their total loan amount when in fact, it is the amount that needs to be paid to the bank to keep availing credit card facilities.
  • There are a lot of hidden costs like processing fees, joining fees, renewal fees, and so on. 
  • Could negatively impact your credit score in case of missed payments.
  • In case of a default, the interest rate is higher than that of a personal loan.
  • Because of the ease of access, several people fall into severe debt.
  • Risk of credit card fraud.

Loans against gold

Almost all major banks provide a facility wherein you can use gold as collateral to get a loan. These are preferred to personal loans due to the relatively lower interest rates.

Advantages

  • Lenient eligibility criteria as income proof or credit score are not required.
  • Lower rates of interest than personal loans.
  • Quick processing with zero processing fees.
  • No foreclosure charges.
  • Flexibility in repayment options.

Disadvantages

  • Relatively low Loan to Value or LTV ratio.
  • Unsuitable for long term loans.
  • Possibility of loss of gold in case of inability to repay.

Loan against an insurance policy

Here, loans can be taken while using insurance policies as collateral. 

Advantages

  • Decent LTV ratio.
  • Lower interest rates relative to personal loans.
  • Quick processing.
  • Loan is secured and independent of the credit score.
  • A higher loan amount can be accessed.

Disadvantages

  • If the policy is relatively new, the loan amount that can be availed is low.
  • Loans are not given against term plans.
  • There is a minimum wait period before you can take loans against insurance policies.
  • The payment load increases as the borrower needs to pay back the loan while paying insurance premiums. In case of a default in either, the insurance policy will lapse.

P2P Lending

P2P or peer-to-peer lending is a practice wherein online platforms are used by lenders and borrowers, both individually and for small businesses, to lend and borrow at simultaneously agreed-upon terms. The online platform offers both secured and unsecured loans.

Advantages

  • Faster and more convenient as all transactions are conducted online.
  • Lower rates of interest.
  • The credit score is unaffected.
  • Since the loans are not officially issued by a financial institution, investors can get traditional loans.

Disadvantages

  • The eligibility criteria are stricter as the creditworthiness of borrowers is evaluated twice.
  • High processing fees.
  • It is not easily accessible everywhere as there are legal complications.

Loan against shares

Instead of selling your shares to raise money for your needs and miss out on potential future returns, you could use the shares as collateral to raise a loan. The same is applicable to mutual funds as well. 

Advantages

  • Quick and convenient.
  • Repayment flexibility.
  • Returns from the securities can be used to pay off the loan.
  • Lower interest rates.
  • No prepayment charges.

Disadvantages

  • Low LTV ratio (LTV ratio is loosely the percentage value of an asset that a financial institute would payout as loan. It is observed to be lower when having stocks as the asset) .
  • Usually, loans are only approved when the stock belongs to reputed companies.
  • Inability to sell stocks.

Conclusion

Financial emergencies never come announced. But one need not always look at banks for loans. There are several better alternatives to personal loans. It is crucial to meticulously consider all the available options and choose the one that aligns with your needs and overall financial goals. Study other viable options in detail and only then proceed to draw a loan.

Ayushi Mishra

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