What’s better than a personal loan? Borrow against your assets

The lien on the collateral reduces the risk and makes the lender extend credit to customers without a score or history, Photo: Mint
The lien on the collateral reduces the risk and makes the lender extend credit to customers without a score or history, Photo: Mint


  • Borrowing against financial assets is better than liquidating your goal-linked investments.

Investments in fixed deposit (FD), insurance, Provident fund (PF), securities and gold do not just earn returns for your long-term goals. These can be used to meet any urgent cash requirements as well. These financial assets can be collateralised to banks and non-banking financial institutions (NBFCs) to borrow up to 90% of their market value for personal use.

Borrowing against financial assets is better than liquidating your goal-linked investments. Also, interest rates on secured loans are cheaper than the 15-40% charged on personal loans and credit cards. They offer higher credit limits, and new credit borrowers can also easily get a loan. “The lender has a lien on the collateral against which the loan is taken. This reduces risk on the loan and helps the lender extend credit to customers without a credit score or history," said Adhil Shetty, CEO, BankBazaar.

However, secured loans won’t be useful if you’re looking to borrow smaller amounts of 5,000- 15,000 as the former comes with higher minimum loan amount thresholds. Besides, lenders charge a high processing fee and other miscellaneous charges (see table), as against instant loans offered by fintechs, that push up the loan value. Mint tells you six financial assets that you can pledge as collateral for loans.

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Mutual funds and bonds: Loan can be taken against MFs (both equity and debt), shares and bonds, including NSC, KVP, RBI bonds and NCDs. In case of MFs, a certain number of units (not current value of units) are pledged and the underlying value of those units keep changing as per market movement.

Loan against securities is typically offered as an overdraft (OD) facility of one year, which can be renewed. This means that the interest is charged only on the amount utilized from the OD. Some banks offer a term loan on debt securities.

Bonds and pledged MF units continue to earn interest and dividend payout, if any, during the loan tenure.

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Since the value of MFs and other market-linked securities are subject to market movement, lenders re-evaluate the market value of pledged securities regularly. In the case of a market crash that reduces the securities’ value below the Loan-to-Value (LTV) ratio, lenders ask for additional security or funds. “Any shortfall in the maintenance of the 50% LTV occurring on account of movement in the share prices shall be made good within seven working days," RBI has said in a note.

FD: Like securities, loans against FDs are given as OD. The primary conditions are that the borrower must have an account with the same bank where they have an FD and should be 18 years or above. FDs in the name of a minor can’t be pledged as security by the parent or guardian.

Since the bank overtakes ownership rights of the FD while sanctioning the loan, the bank holds the right to liquidate it and recover the loan amount if the borrower fails to repay it within the term of the FD.

Car: Unlike gold and property, the owner doesn’t have to keep the car in the lender’s custody or submit the ownership documents as collateral. “Securitisation in this case happens in the form of hypothecation on the RC (registration of certificate)," said Namit Jain, CEO and co-founder, Rupyy. Hypothecation works as leasing - the lender in a way leases the car (pledged as collateral) to the borrower and the latter cannot sell it without getting an NOC from the lender. “Hypothecation is also done on the insurance of the car," said Jain.

Borrowers can also pledge a car they are servicing a loan on. In this case, the same financier will offer you a top-up loan on the existing loan. “Existing loan on the car is closed and a fresh loan is issued comprising the outstanding amount from the previous loan plus the amount you want to borrow," said Jain.

Borrowers don’t necessarily have to borrow from the same financier, and they can transfer the balance to another lender if they are offering better interest rates. Lenders can offer 150-200% of the car value as loan to those who have a good car loan repayment history with the same lender.

Insurance: Traditional life insurance policies, including endowment plans, money-back policies and Unit-linked Insurance Plans (ULIPs) can be pledged for a loan. Term plans, however, can’t be pledged. The policy will qualify for loan after a surrender value is assigned to it, against which the loan is sanctioned. In the case of Ulips, the loan amount is decided as per current market value of the accumulated corpus and is limited to 40% for equity-focused funds.

The borrower has to repay the interest as per the repayment schedule set by the lender. The principal can be repaid along with interest during the loan term or the borrower can get it adjusted against the claim amount at the end of the policy term. On default of interest, it is added to the outstanding principal and gets compounded. Multiple defaults could lead to the loan amount exceeding the surrender value, which will cause the policy to lapse. In case the policyholder dies during the policy term, the outstanding principal and interest is deducted from the sum assured paid to the beneficiaries.

Gold: Probably the most popular secured loan option, gold loans offer credit options for short to medium term of six months to three years at interest rates starting at as low as 7%. The interest rate increases on the basis of gold purity and tenure of the loan. RBI has capped the LTV of gold loans at 75%, which means the lender can offer a maximum of 75% of the gold’s value being pledged as loan. However, most lenders maintain a margin of 40-60%.

PPF: Borrowers should not confuse loan against Public Provident Fund (PPF) with Employees’ Provident Fund (EPF). The latter allows partial withdrawal of your own funds, while the former gives a loan against the balance that has to be repaid with an interest.

“EPF advance withdrawn from one’s PF account is not a loan and is not needed to be deposited again in the EPF account," said Gaurav Aggarwal, senior director, Paisabazaar.

After you take a loan, the balance equivalent to the loan amount doesn’t earn interest till the principal and interest are fully paid. For this reason, effective interest on loan against PPF works out to 1% plus the prevailing interest rate.

You can apply for a loan only between the third and end of the fifth year of opening the account and the loan has to be repaid within three years, failing which the interest rate is raised to 6% from 1%. “The loan can be repaid in a lump sum, in two instalments or in monthly instalments within 36 months," said Aggarwal.

If the principal is repaid by the end of the third year but the interest remains, it is deducted from the remaining balance.

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