We look to credit when needed. However, there is often confusion over which type of loan to opt for. How to determine the type of loan best suited to your needs? This question is especially relevant when it comes to choosing the right secured loan.
There are three things one should look for when evaluating different secured loans to choose the right one: required collateral, interest rate, and term. The most common ways to organize finances are by borrowing against an asset, and the most common assets are property, term deposits, and gold. Let’s look at the loans against each of them in the context of the factors mentioned above.
There are two ways to get a loan using your property as collateral. The first is via an additional loan on an existing mortgage and the second is a loan against real estate.
# Complementary loan: You can qualify for a top-up loan if you have a running home loan with a good repayment history. The main condition here is the LTV (Loan to Value). The total outstanding balance after reloading must be within the same LTV range the loan was issued to. For example, if you have been approved for 80% of the value of the property as a loan, the total principal outstanding, including the top-up, may be as high as 80%. If this is the case, the bank will extend a supplement on your mortgage.
However, “in the event that your home loan is recent and the top-up exceeds the allowed LTV, you may not be able to get a top-up. The complementary loan is a good alternative because of the interest rates which are at the same level as the rates for home loans. You also get a long term to repay the loan. In addition, if you borrow to repair or renovate your home, the additional credit also offers you an additional tax advantage. However, the long repayment term also translates into much higher interest payable, ”says Adhil Shetty, CEO of BankBazaar.com.
# Loan against property: If you don’t have an outstanding home loan but own a property in your name or jointly own it with someone you can apply for a loan from, you may be eligible for a loan against a property. On the positive side, the home loan comes with a longer repayment term than other personal loans. Depending on the end use of the borrowed money, you may be eligible for tax benefits.
For example, if you use the money for business purposes, interest paid and incidental charges, such as processing fees and documentation fees, may be claimed as business expenses under section 37 ( 1) of the Income Tax Act. But if you use it for personal reasons such as a wedding, study, or vacation, you cannot get any tax benefit. On the other hand, the interest rates on home loans are much higher than a complementary loan. The processing time for a home loan is also much longer, as the lender will have to perform a number of due diligence checks.
Loans for Term Deposits (FDs) are among the cheapest borrowing options. Loans against FD are typically valued at 50 to 250 basis points above the relative FD rate. Since FD rates are currently on average 5.5%, you can get a loan against an FD for as little as 6% to 6.5%, which is cheaper than a home loan. Most lenders do not charge prepayment or processing fees. “The only caveat here is that you must have an FD whose deposit value is at least 10% more than the loan you are borrowing. So if you need to borrow Rs 2 lakh against your FD you must have a FD of about Rs 2.2 lakh. On the other hand, there are no tax advantages on loans against FD. of the loan cannot exceed the duration of the FD against which the loan is taken and must be repaid before the maturity of the FD ”, informs Shetty.
Gold loans are the most versatile and sought after secured loans. This is because they require very little paperwork for an offline loan and they come with a variety of repayment options. The time required to process a gold loan is very short compared to other forms of secured loans. Processing fees are low, and often lenders do not take the borrower’s income or credit rating into account when approving the loan. This makes getting a short term loan very easy.
However, “gold loans can be complex in their own way. Most lenders will ask for a purity of at least 18 carats and may charge you an appraisal fee. The higher the purity of the gold, the higher the valuation and loan amount will be. Different lenders have different repayment options. Some may allow you to pay the interest monthly and the principal all at once at the end of the term. Others may require you to pay a portion of the principal each month. Still others may actually deduct the interest owed when they give you the loan. You have to understand the financial implications of these and choose what works best for you, ”says Shetty.
However, all loans have consequences in the event of default. In case of secured loans, you risk losing your asset in the event of default. If you do not repay the loan on time, your pledged property can be seized to collect the outstanding balance. It will also have a negative impact on your credit history and your score. So only borrow what you need and pay back quickly.