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Are There Better Alternatives To A Personal Loan?

A personal loan can address your urgent need to get money, but did you know that there might be better alternatives of getting funds at far cheaper rates, and perhaps on better terms. Let's discuss what these are:

1. Borrow from family, relatives or friends: When you find yourself in a financial crunch, the first option you should consider is to borrow money from someone in the family. Often, this might be the safest option since these types of lenders might be willing to give you a loan on more generous terms than a bank. Additionally, if you can pay the loan sooner than what you had promised, you're your family or friends will not charge you a penalty fee to foreclose the loan.
   

   When borrowing from your near and dear ones, you must keep the following things in mind:

   • If the loan amount is high, you should ideally have a written transaction to avoid any complication later, especially if you are borrowing from friends.
   
   
   • Have other witnesses present at the time of borrowing the money.
   
   
   • Make sure you repay from time to time to signal that you are taking your obligations seriously.
   
   


2. Loan against property (LAP): If you own a house you can use it as collateral to get a loan. The sole benefit of taking a LAP against a personal loan is that it is available at lower interest rates, in the range of 12% to 14% compared to up to 24% for a personal loan (rates as of May 2010).


3. Loan against investments: In case you are in need of urgent funds, another safe option is to cash out your investments in shares, gold or mutual funds. If you are not comfortable liquidating your investments in case you are holding them for long-term or are concerned about the tax liability on exiting these investments, then you can consider raising a loan against these instruments. Some potential options are:
   
   • Loan against public provident fund (PPF): You can avail of a loan against your PPF investment from the third to the sixth year. Loan is available up to a maximum of 25% of the balance in your account at the end of the second preceding financial year. If you repay the loan in 36 months, interest will be charged at 12%. Otherwise, interest will be charged on the outstanding sum at 6% per month. A second loan can be obtained before the end of the sixth financial year if the first one is fully repaid.
   
   
   • Overdraft against fixed deposits: This is another safe option when you are in need of urgent cash. You can use the fixed deposits by taking an overdraft against it rather than breaking it. You can get up to 80% to 85% of the deposit amount and the interest rate is typically 1% to 2% higher than the deposit rate. The repayment needs to be made within the time period for which you have the fixed deposit.
   
   
   • Loan against securities: You can use your investment in shares or mutual funds as security to immediately receive a loan or an overdraft facility to meet your financial needs. This way you will not have to sell your shares or redeem funds in case you have invested for a long-term. The tenure for such loans varies from lender to lender. Typically, the overdraft limit is around 50% of the value of the securities used as collateral. The rate of interest on such loans ranges from 13% to 16%. There are no foreclosure charges on such loans.
   
   
   • Loan from employer: Under some conditions, employers might also agree to offer a loan to you and adjust the repayments with your salary. Another option that you may have is to request for advance salary from your employer so that you can address the financial requirement. Check with your employer if this facility might be available to you.
   
   

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