There are several ways to avoid expensive personal loans for your big-ticket purchases during this festive season

The festive season is round the corner. If you are thinking of making a big purchase during this season but the thought of meeting your requirements through high-interest personal loans or credit cards is bothering you, take heart. Instead of going for such expensive loans, you can raise money at much cheaper rates. This is possible by pledging your investments. "Borrowing against these securities is advisable compared to a person availing of a personal loan or who has revolving credit card dues, where the interest rates will be much higher," says Rajesh Dalmia, a certified financial planner. You can consider the options listed below, but we hasten to add that smart spenders always save for their big purchases:

Gold:

In the past few years, local jewellers or neighbourhood pawnshops have replaced banks in disbursing loan against the yellow metal. You can get 70-80% of the value of gold pledged as loan. The loan involves lesser documentation and is disbursed within a few hours. Banks also offer an overdraft facility where you can withdraw money as and when required. In an overdraft facility, the interest is charged on the amount utilised daily and is debited at the end of every month. In case of term loans, most banks ask for repayment at maturity instead of monthly payments along with interest.

Insurance Policy:

You can meet your short-term requirement by availing a loan against your insurance policy as well. The policy can be pledged either to the insurer or bank. However, this facility is available only against policies which accumulate cash value like endowment plans. The loan value depends on the surrender value that the policy acquires at that time. This is 90% of the surrender value or 85% of the paid-up value of the policies. So, if you are insured for 1 lakh through a 20-year plan and have paid 13 annual premiums, you can easily go for a loan of 50,000 against it. "The amount of loan provided against a policy is proportionate to the number of premiums paid. Higher the number of premiums paid, the bigger will be the loan amount," says Rajesh Dalmia, a Kolkata-based certified financial planner.

The rate of interest varies across lenders. LIC, for instance, charges 9% interest half-yearly. With State Bank of Mysore, you have to shell out 12%. You can repay the loan either with interest or continue paying the interest and allow the principal to be deducted at the time of the claim. The minimum period for which a loan can be granted is six months from the date of its payment.

Apart from traditional policies, you can also avail of a loan against Ulips. New Ulips introduced by a few insurers carry a clause that lets you take a loan against them.

Public Provident Fund:

You can take up to 25% of the amount lying in your PPF account at the end of the second preceeding financial year as a loan through any branch of State Bank of India that you have an account with. This can be availed of between the third and sixth year. The repayment has to be done in 36 monthly instalments and you pay 1% interest every month. If you are unable to repay, the interest is charged on the outstanding sum at 6% per month. The interest has to be paid in not more than two instalments after the loan amount is fully repaid. You can also avail of a second loan if the first one is fully repaid. "PPF is a kind of retirement saving and any loan should be taken only in case of emergency or urgent requirement," adds Dalmia.

Mutual Fund:

For some urgent fund requirement, units of your mutual fund scheme can also be pledged in favour of a bank. However, before pledging with the bank you have to make sure that your fund finds mention in the list of schemes approved by it. Every bank has a list of approved schemes against which it lends. The process of taking a loan against them starts with lien marking, which essentially means that you cannot redeem these units till you repay the loan to the lending body. It usually takes five working days. Once this is done, units are pledged with the bank. These units can be partially or fully pledged. In case of partially pledged units, lien marking is done for those units. In an equity fund, you can avail of a loan up to 50% of its net asset value (NAV). You can raise up to 90% against a liquid fund.

Shares:

Like mutual funds, you can get a loan against shares also through an overdraft facility. Some banks, however, also provide term loans against shares. While the Reserve Bank of India (RBI) allows banks to lend up to 75% of the value of demat shares and 50% of the value of physical shares, this limit varies across banks. The shares are revalued weekly and, accordingly, the drawing power is revised. If the new drawing power is less than the outstanding amount, you will be required to put in the difference amount or pledge more shares to regularise the account. But, if the drawing power rises, the limit available to you also automatically increases. You can take a loan against a single security as well pledge a group of shares. Usually banks provide loans against a basket of shares to hedge risk.

Fixed Deposits:

Instead of breaking your fixed deposit (FD) and bearing penalty charges, you can raise an advance against it. You can raise up to 90% of your FD amount as a loan to meet the emergency. The interest charged on such loans is generally 1% or 2% higher than the interest you receive on it. You can hold the loan till the maturity of the FD or prepay it earlier. In case the loan is not repaid till maturity, any outstanding balance is adjusted against your FD proceeds. According to experts, an advance against an FD makes sense only when you are expecting funds early. "It is an unwise move to break the FD only to be reopened after 4-5 days and bear the penalty," says Veer Sardesai, a Punebased certified financial planner.

NSC & KVPS:

National Saving Certificates (NSCs) and Kisan Vikas Patra (KVPs) - the two most popular small saving schemes (with a mandatory lock-in period) can be pledged to raise quick money. Most public and private sector banks offer loans against them. However, unlike a loan against gold and FD, it will take 2-3 days for you to get a loan against NSCs and KVPs. "Since these certificates are not issued by banks themselves, they go through a verification process which takes longer," says Anil Chopra, Group CEO, Bajaj Capital.

The loan amount also varies across banks. The interest charged is linked to the base rate. Though these tips can help you raise funds faster and cheaper than a personal loan, experts say that they should be used as the last resort and only for productive purpose. Says Dalmia: "One should look at this facility with an objective of repayment at the earliest possible, so that future goals are not derailed." Concurs Bajaj Capital's Chopra, "You should go for them in case of a dire need. If you raise money through them every now and then, you will compromise your goals."

Source: The Economic Times