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6 alternatives to beat expensive personal loans

Last updated on: September 10, 2012 19:12 IST

6 alternatives to beat expensive personal loans

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Vaibhav Aggarwal, RupeeTimes.com

There are times when people face urgent cash requirements, but cannot come up with the required amount from their existing resources. During these pressing times, taking a personal loan from banks seems to be the only way out. Some people are also tempted to avail personal loans because it can be taken for any personal requirement, there is minimum paperwork involved in processing being unsecured loans banks usually do not ask for collateral.

But due to its high interest rates it is also one of the most expensive options for fulfilling urgent needs. Most banks charge anywhere between 15 per cent to 24 per cent interest on personal loans. In terms of being expensive, personal loans are second only to taking cash advances on credit cards which have interest rates of over 30 per cent. Due to its high interest rates, it becomes unviable for some people to take personal loans.

Given the drawbacks associated with personal loans, a person is forced to think of what could be an alternative to this. Today, there are other cheaper options available in the market which can be used to raise cash for various purposes in a short span of time.

Here are six best alternatives that would cost you lower interest rate than personal loans.

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1. Gold loans

Gold loans can be considered as one of the most popular substitutes of personal loans. Gold loans score over personal loans because of lower rates of interest offered on them as against personal loans.

Gold ornaments or coins can be pledged to take loans from banks or gold loan companies like Muthoot Finance or Mannapuram Gold. Typically, interest rates on gold loans depend upon the value of gold provided as security to the banks and amount of loan taken.

The higher the difference between them, the lower will be the interest rates offered on the loans.

For example, if loan is taken for 80 per cent to 90 per cent of the value of gold then about 12 per cent to 15 per cent interest rate is charged on the loans. This is the highest rate of interest which is charged on these loans.

Gold loans also consume very less processing time thereby scoring again over personal loans. These loans are granted within 24 hours to a day of applying for them. They do not have pre-processing charges and involve easy paperwork of the likes of address proof and photo ID proof.


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2. Loans against insurance policy

Another good alternative to taking a personal loan is taking loans against existing insurance policies such as LIC endowment policy etc.

These loans can be availed by pledging the insurance policies to the banks, which generally provide loans up to 90 per cent of the current surrender value of the policies. Interest rates offered on these loans range from 9 per cent to 13 per cent.

But, loans can be taken only against those policies which have their premiums paid on regular basis for three years or more.

In other words, your policies must be at least three years old for them to be pledged for availing loans. It takes about 2 to 3 days to get loans against insurance policies.


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3. Loans against fixed deposits

In case an individual has a long term fixed deposit, and needs urgent cash then instead of breaking the deposit s/he can take loan against the fixed deposit.

This is also called overdraft on fixed deposit.

Usually, banks lend up to 75 per cent to 85 per cent of the deposit amount as loans. The interest charged on loans against fixed deposits is just 1 per cent to 2 per cent higher than the interest rate on the fixed deposit.

This means that if the deposit was earning an interest of 8 per cent then loan taken against it will have interest rate of 9 per cent to 10 per cent. The loan needs to be repaid before the maturity of the deposit.


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4. Loans against property (LAP)

Loans can be taken against immovable property like home, plot of land, office space etc. Banks and financial institutions usually provide loans up to 50 per cent to 60 per cent of the market value of the property.

Lending institutions may undervalue the assets while granting loans on them so it is advised to get third party valuation done to increase the amount of loan to be availed against the property.

But, the interest rates charged on these loans is from 12 to 16 per cent, which is close to the interest rates provided on personal loans.

It takes up to 7 to 10 days in the processing of these loans.

State bank of India is providing loans against property for up to 60 per cent of the value of the property @ 15.25 per cent. It provides loans from Rs 25,000 to Rs 1 crore.

Taking loans against property is recommended only for huge cash requirements of more than Rs 5 lakh. It should be avoided in case the requirement is less than this amount.


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5. Loan against investments

When in need of emergency funds, an individual can also fall back upon investments such as shares, mutual funds etc. These investments need not be liquidated. They can be used as collateral for taking loans.

But, it should be remembered that all shares and mutual funds cannot be pledged for taking loans. Lending institutions usually have their own list of approved mutual funds and shares on which they provide loans.

Also, since the value of these assets fluctuate from time to time, banks keep a high margin while providing loans against them. So, for shares worth Rs 5 lakh, loans are provided for amounts much lesser than Rs 5 lakh.


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6. Loan from employer

At times, employers also provide loans to employees and the repayments on these loans are adjusted against the salary of the employee. Asking the employer to provide cash advance on salary is also an option which can be used to address an urgent financial need.

These options are some great ways to avoid taking a personal loan not only in terms of interest rates but also in terms of the time taken to address the financial need.


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