Loan against assets is a cheaper
alternative to personal loans that charge you anywhere between 16% and 24%
A personal loan is the easy way out for many
individuals. Stuck with a small mismatch of funds, many people don’t think
twice before applying for a personal loan. The money may be used for something
big like bridging the gap for a house purchase or unproductive purposes like a
vacation or a grand wedding. But the trouble with personal loans is: they are
very expensive. Banks charge around 16% to 24% on these loans. That is why it
is imperative that you should explore other avenues before settling for a
costly personal loan. If you don’t have the option of a soft loan from friends
or relatives, you should consider taking a loan against your assets.
“Asset-backed loans such as loan against securities, loan against gold and loan
against property help you cut down the cost of borrowing,” says Madan Mohan, a
Mumbai-based independent financial counsellor. A loan against shares is
slightly cheaper at around 12.5%, and a loan against property would be
available at around 14%.
LOAN AGAINST PROPERTY
To begin with, banks offer a percentage of the market value of the asset as
loan to you. For example, suppose you are offering your house as a security to
the bank. The bank will assess the market value of the house and your loan
repayment ability. If the assessed market value of the house stands at . 1
crore, the bank may consider offering a loan of up to . 60 lakh. The bank will
also consider factors such as residual life of the property and the maximum
tenure it can allow to repay the loan before approving you the loan. If you
have bought a house using a home loan, you can still get the additional loan.
Banks offer such “top-up” loans to their home loan customers. The maximum loan
amount under this product is around 70% of the market value of the property
less the outstanding loan and is subject to the current loan eligibility.
Apart from the lower interest, loan against property also comes with a longer
repayment tenure. A bank typically allows a maximum repayment term of five
years for personal loans. Loans against property, on the other hand, come with
a longer repayment tenure of up to 10 years. Banks also allow higher amount of
loan under loan against assets. Personal loans are generally capped at . 20
lakh, but one can get as high as . 5 crore under loan against property. But
obtaining loan against property takes time. “A loan against property involves
valuation of property, legal and technical checks from bank, which consume some
time. If you are in a hurry, opt for loan against movable assets such as gold
and shares,” says Harsh Roongta, founder & CEO of Apnapaisa.
LOAN AGAINST GOLD & SHARES
Banks offer loans against gold, shares, mutual fund units and insurance
policies. In case of loan against gold, you will come across banks
offering as high as 70% of the gold value. NBFCs will restrict the loan amount
to 60% of the value of gold. For shares and mutual fund units, banks apply a
haircut of around 50% of the market value. Most of the banks will allow loans
against liquid shares – read “A” group shares. If you have a single-stock
portfolio, banks apply higher haircut than for a diversified portfolio. If you
offer shares of only one company, banks may apply 60% haircut and you may get a
loan of up to only 40% of the market value of these shares. As single stock
means higher risk for the lender; so it is better to approach the bank with a
diversified share portfolio or mutual fund units. In such cases, one may get up
to 50-55% of the market value.
Even in case of diversified equity portfolio, banks assess weight of each
share. If one company’s share has more than 60% weight in the portfolio, the
bank may prefer to cap the loan to 40% of the market value. In case of life
insurance policies, you can get up to 50% of the surrender value of a policy. That
means your term insurance policies with no surrender value are not eligible for
loans.
Interest rate on a loan backed by movable asset, such as gold, is generally
lower by around 150 to 200 basis points compared to a loan against property.
Also the interest rate depends on the loan to value ratio – the extent of
market value of asset that the bank is offering as loan. “If the bank is
offering higher loan against the value of the asset, it may charge higher rate
of interest too, to compensate for the high risk it takes,” points out Harsh
Roongta. Processing fee on a personal loan is generally around 2-3% of the loan
value, whereas for a loan against property it stands at around 1%.
The borrower has to bear the valuation expenses, stamp duty payable toward
mortgage and other legal charges too, which are one-time expenses. It is better
to think for a while before choosing a loan.
Source
– Nikhil Walavalkar - The
Economic Times – 28/6/2012
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