Mitigating Financial Downfalls with Loan Options in Covid Year

The health and economic uncertainty, caused by the pandemic, can lead many towards financial shortfalls or cash flow disruptions. Such circumstances may call for availing loans that involve no restriction on end usage of funds and have quicker loan disbursal. Let’s take a look at five loan options to deal with financial exigencies that can be beneficial for us:

Personal Loan

No restrictions on end usage of funds, no requirement for pledging collaterals, minimal documentation, and quick disbursal, usually within two to seven days of a loan application, make personal loans an excellent option to mitigate financial shortfalls. Some lenders also offer pre-approved loans with quicker disbursal to select consumers, especially those having existing customer relationships with the lender. 

 The interest rate of personal loans can vary widely between 10 and 24 per cent per annum, depending on the applicant’s monthly income, credit score, job and employer profile, and other eligibility criteria. The loan amount sanctioned can range between Rs 50,000 to Rs 40 lakh, depending on the applicant’s repayment capacity. The repayment tenure usually ranges between one and five years in the case of most lenders, with some lenders offering higher tenure of up to 6-7 years.

 Gold Loan

Gold loans have one of the quickest disbursals, with lenders usually disbursing loans within the same day of receiving the application. While most lenders offer gold loan repayment tenure of usually up to three years, some lenders offer comparatively longer tenure of four or five years. The loan amount primarily depends on the pledged gold’s valuation, as per the lender and sanctioned LTV ratio, subject to the regulatory cap of 75 per cent on gold loan’s LTV ratios imposed by the RBI.  

Another major advantage of gold loans is repayment flexibility. Apart from the usual EMI mode, many lenders also offer bullet repayment options or allow the borrower to repay the interest amount upfront and pay off the principal component at the end of the loan tenure. Availability of such flexible repayment options can be beneficial for those lacking uniform cash flow.

Loan Against Credit Card

Pre-approved loans against credit cards are offered by card issuers to select cardholders based on the card variant, spending pattern, and bill repayment history. The pre-approved nature of this loan ensures quicker disbursal among all loan facilities, usually within the same day of receiving the loan application. Some card issuers disburse loans instantly or within a few hours of receiving the loan application. The interest rate primarily depends on the card user’s repayment history and other aspects of his credit profile. 

The interest rate can be slightly higher than personal loan interest rates, offered by the same lender to the same cardholder.

The loan amount is usually in proportion to the free credit limit of the cardholder. However, some card issuers also offer a variant of loan against credit cards wherein the loan amount is over and above its credit limit. 

Loan Against Securities

 Loan against securities (LAS) is offered against the collateral of bonds, shares, ETFs, mutual funds, NSC, life insurance policies, and KVPs. The borrower continues to receive the interest, dividends, bonuses on the pledged securities during the loan tenure. The loan amount depends on the lender’s risk assessment of the securities pledged as collateral, subject to the cap on the LTV ratios assigned by the RBI for those securities.

 LAS is usually offered in the form of overdraft facility with a sanctioned credit limit wherein the borrower can draw the entire sanctioned limit or a part of it and keep repaying them as per his monetary needs. The interest is charged on the amount drawn till its repayment. While the borrowers are generally required to monthly service the interest component, they are free to repay the principal amount as per their cash flow, till the maturity of tenure of the overdraft facility, without incurring any prepayment charges.

 Top-up Home Loan 

Top-up home loans can only be availed by existing home loan borrowers with good repayment history. The eligible loan amount sanctioned by the lenders is usually the difference between the sanctioned and the outstanding loan amount. The repayment tenure of top-up home loans cannot surpass the residual tenure of the original home loan, with many lenders capping the maximum tenure at 10-15 years. 

As the interest rate of top-up home loans are generally the same or a notch higher than the interest rates levied on the underlying home loan, top-up home loans remain one of the cheapest credit options for borrowers. 

The only flip side of top-up home loan is the longer disbursal time, usually between one and two weeks. However, some lenders have started offering pre-approved top-up home loans with same day disbursal.

The author is  Director and Head of Unsecured Loans, Paisabazaar.com 

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.