Different Kind of Loans In India against securities

What are the different types of loans you can take in India ? Do you always think about Personal loan when you want a loan? A lot of people despite having different kind of assets go for personal loan even if they have other options where they can mortgage an existing asset and take a loan at lower interest rate. In this article I will give you 5 alternatives to personal loans and tell you a little bit about each.

Personal Loan

Before we move forward let us understand a basic rule of lending. There are two kind of loans , Secured Loan and Unsecured Loan. Secured loan is a loan where a lender has access to some kind of asset so that incase you run away, he can liquidate the asset and take his full or partial money back, as there is a sense of security in secured loans, you have to pay a lower rate of interest on these loans. However an Unsecured loan is a loan where the lender has no access to any asset and incase you run away, bank has no way to get back that loan , that’s the reason you have to pay very high interest rates on these loans, Personal loan and credit card are examples of these loans. The biggest reason why someone should go for these alternative loans is that the processing of these loans are much faster and better interest rates compared to a personal loan. So now lets see some alternatives to personal loan incase you posses an asset.

1. Loan against Gold

Lets me start with the best option to take a secured loan in India. You can pledge your Gold jewellery and take a loan from Banks and companies like Muthoot Finance or Mannapuram Gold. The best thing about gold loan is that the processing is extremely fast (from few hours to 2-3 days) depending on your case. The way it works in Gold loan is like this – The higher the margin of safety you leave , the lower the interest rate. Here is an example , if you have gold worth Rs 10 lacs and you are ready to pledge it for a loan of just 5 lacs, then you are leaving a comfortable margin of Rs 5 lacs for Bank (incase you run away or gold prices decline) . So in this case you will get a very good interest rate offer , but if you take a loan which is 80% or 90% of the worth , then you will be asked for a very high interest rate. Generally the interest rate asked is between 12% – 15% .

There are no pre-processing charges or too much documentation involved in gold loan, in most of the cases the only thing required is your address and id proof. that’s all and you can get a loan within 24 hours easily .

2. Loan against your Insurance Policies (LIC/SBI)

Lets talk about LIC policies here. You can also get a loan on your LIC policy incase its eligible for loan (most of them are) . But to get loan on your LIC policy, it should have a SURRENDER VALUE, which happens only after payment of 3 yearly premiums. Only after that you can avail for a loan which would be around 90% of Surrender Value. Lets see an example – Ajay has a LIC endowment policy which has a yearly premium of Rs 50,000 . He has paid 10 years premium (total 5 lac) , the surrender value of his LIC policy is around 3 lacs at the moment. So he can get a loan of around 2.7 lacs.

One can take a loan either from LIC itself (recommended) or from banks, for which they will have to pledge their LIC policy totally to them. So incase they are not able to pay the loan, their LIC policy will be surrendered and company will take their money back. The best part of these loans is that you get it only at an interest rate of 9-10%. So if you have a LIC policy and it has a respectable Surrender Value , then you can take Loan against these policies and not take personal loan which has hefty interest rates. Check the loan amount available on your LIC policy by just sending this SMSASKLIC YOUR-POLICY-NUMBER LOAN to 56677

3. Loan against Fixed deposits

Incase you have a Fixed Deposit for long-term and would not like to break it in times of emergency, you always have an option to take a loan against that Fixed Deposit. The interest rate you will have to pay on that loan should be 1-2% higher than the interest rate earned on the FD and the loan amount available to you would be around 75% – 80% of the FD current Worth. For an example – suppose you have a FD which has its current worth at 10 lacs and you are earning 10% on that FD , then you can get around 8 lacs of loan at 12% interest rate . This is one good option incase you do not want to break the FD and also want to take a loan.

4. Loan against Property

You can also take loan against your property (Residential and Commercial) . Banks give loan upto 50% of market value of the property or 30-40 times your monthly income . The interest rate charges is in range of 13-16% depending on how big the loan is and how much margin you can leave. Loan against property is generally recommended for those who want a big amount as loan for purposes like expansion of business, wedding or some big-ticket expenses. Incase you need just 2-3 lacs of loan then it’s not recommended.

There can be processing and prepayment charges in these loan against properties (LAP) . A good place to compare the loans against property is policybazaar page . Public sectors banks like Bank of Baroda, SBI banks are known to not charge the prepayment penalties and have lower processing charges . All the loans against property comes at FIXED interest rates.

5. Loan against Other investments

Shares and Mutual Funds – There are loans offered against Mutual Funds and Shares , but there is a list of approved Funds and Shares which can get loan, also as the values of shares and mutual funds are highly volatile, there is high level of margin required on it , Means that if you have shares worth Rs 10 lacs , the amount of loan you can get is much lower than 10 lacs.

Public Provident Fund – You can get loan on your PPF account also , but there are some restrictions , you can only get loan from the 3rd year to the 6th year and the amount of loan will be only 25% of the balance in the account 2 yrs back . For example – If you want to take the loan in 5th year after opening your PPF account , then you will only get loan of 25% of the balance in 3rd year , if the balance was just Rs 2,00,00 in 3rd year, then you can only take loan of Rs 50,000 .

So I hope you have got a clear understanding of what options do you have incase you want to take loan against your assets. Note that the lower interest rates are one of the reasons why you should go for these alternative loans, but the bigger reason can be fast processing of these loans in case of emergencies.

88 CommentsAdd Comment

  1. Harpreet

    Dear Mr. Manish,

    I have a query, incase of loan against FD, will the FD continue to gain interest. I am confused. It will be great if you can explain with example..

  2. Amita

    Hi.. Nice article..
    Wanted to not.. what happens, If I take loan on FDs and they get matured before paying of the loan?
    Do I get the FD amount and can I Use it to pay the loan?

  3. Sudhir

    Hello Manish Sir,
    I want to know about Home Loan .
    We are planning to built home of land which is on my fathers name .
    My monthly salary is 27k and needs near about 10 to 12 lacks loan.
    Could you suggest how i get the same .
    And one more I have gold near about 5lacs how much loan did i get on this also.
    please need helpful information.

    • You can get the home loan , considering your father is ready to give a letter saying that incase of non payment of EMI’s , there wont be any legal hassle and the son has to sign on that. But if land is not on your name, it will be tough to claim income tax exemptions

  4. Ram

    Hi Manish,
    I want to get overdraft against my PPF balance for my business purpose. Is it possible to get Overdraft against PPF balance?

  5. Hi Manish
    Nice artilcle and very informative article . The gold loan is easiest to avail and the processing time is also very less. You may get the gold loan on the same day.to compare to all loan the gold loan easy way ..savarable.com

    thanks

  6. Abhijit

    Thanks for this wonderful article.
    Only because of I do not have any other option I am going ahead with down payment being raised by personal loan. I am negotiating some 4-5 banks simultaneously & working on to get the best deal in terms of following….
    1) Rate of interest
    2) Pre-payment charges
    3) Processing fees

    But somehow I am getting into the feeling that there are lot of other hidden charges which I am not aware of like Insurance fees, locking period if in case if I want to pre-close etc.

    Any advice would be a great help for suggesting me the points to consider & the ways to check before concluding on the personal loan.

    As of now the best offer is from Bajaj Finance of 14.5%, no pre-closure charges after 1st EMI, and processing fees of 2%. After this it comes to Standard chartered bank where my salary account is similar offer except 11 months of lock-in for pre-closure.

    Waiting for your inputs if any……

  7. Aru

    Can any individual pledge his LIC Policy with other individuals to get a money on credit? In case of default, can the individual surrender the LIC Policy of the debtor and get his money back from LIC towards it? Pls. suggest.

  8. sudhir

    i am applying for loan against propety for amount of Rs 15 lacs from LIC.
    LIC is providing the following rates
    Scheme I : 10.75%
    Scheme II : 10.70% (Fixed for 3 yrs), 11.15% (Fixed for 5 yrs)
    Scheme III : 10.95%(Fixed for 10 yrs)

    which one is the best option to choose if the tenure is for
    1)10 yrs
    2)15 yrs

  9. Abhijit

    Hi Manish,

    As requested by Veman December 29, 2011 at 12:08 pm above.

    Any update on whether you have made some research on keeping the Gold at home SAFE?

    Thanks in advance.

  10. athi

    good article. I have gone through forum as well and i could not find out the clarification which I want.
    Situation: I took a homeloan from HDFC for 15 years (180 months) with interest rate of 10.5. I paid part payment 9 lakhs and reduced the tenure to 108months.
    Query: I am eligible to get 1 lakh loan amount from my LIC policy to make an another part payment to the home loan. Is it a good idea? can I save some bucks by paying like this. Please advice.

  11. Abhijit

    No no, not insurance but was thinking of some secret places like secret cabinets of something (as it is done in olden days). Need to dig some more for the same.

  12. Abhijit

    Hi Manish, any update on the securing your gold at home? as requested by Vemen (post 11) Any plans to have an article on this subject?

    Curious to know about the same…I have no surprise if there are many more on this forum who are also curious about the same.

  13. HARJEET KAUR

    What can be the tenure for the mortgage loan on Gold from Muthoot Finance?

    Can we take loan for2-5 years? does Rate of Interest change?

    Regards,
    Harjeet Kaur

  14. Rahul K.

    Hey Manish… Do u happen to any bank which can provide loan against open plots (DTCP Approved plot in Hyderabad – to be more specific)??

    I’ve tried inquiring few but they were keen on a construction on the land.

    Any suggestion would be highly appreciated. Thnx.

    • Rahul

      No idea about it , you might want to enquire on our forum . THis is very specific question and I am not sure if some one will really know answer unless he/she has experienced this : Live From A Lounge

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