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Gold is not the only financial asset that you can pledge to get a loan when needed. Term deposits (FD), PPFs, insurance policies and mutual funds (MF) can also be used to obtain a loan. In addition, a loan on these assets is cheaper than a personal loan.
Fixed deposit (FD): Banks offer an overdraft facility (OD) on FDs of up to 90% of the value of the FD. The interest rate is 0.5% to 2% higher than the interest on the FD and there is no repayment term because you can repay the borrowed money as long as you hold the FD. Please note that you cannot borrow against economic FDs over 5 years.
FPP: The loan facility on the balance of the public provident fund (PPF) is subject to several conditions. You can only get a loan on your PPF balance from the third year of opening the account until the sixth year. The maximum amount you can borrow is 25% of the total available balance in your PPF account immediately preceding the fiscal year in which you are requesting the loan. As for the interest rate, 1% is charged, but the balance of the PPF equivalent to the loan taken out does not earn interest until the loan is repaid. The loan is repayable in 3 years, failing which an interest rate of 6% is taken on the loan.
MF / actions: Typically, banks provide 50-70% of the market value of stocks or the net asset value of mutual funds (MFs) as a loan. The interest rate on these loans ranges from 10 to 12%. Adhil Shetty, Managing Director of BankBazaar.com, said that not all stock or holdings of MF can get you a loan. “Banks have their own list of securities they accept as collateral. They usually take into account parameters such as market cap, volatility of the share price and liquidity of the share to decide and the loan amount can fluctuate with the volatility of the market. If the stock’s value drops, the lender may ask you to increase the stock’s value by pledging more stock or replenish it by putting in the necessary cash funds. “
Equity Linked Savings Program (ELSS) funds cannot be pledged towards a loan.
Assurance: Only traditional policies can be pledged for loans and only after 3 years from the start of the policy. You can borrow up to 90% of the cash value of the contract at an interest rate of 9-12%. If the policyholder dies before the loan is repaid, the remaining loan amount is deducted from the claim amount.
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