Borrowings against shares, gold, property are cheaper than personal loans. Nikhil Walavalkar discusses the pros and cons
unds. Sadly, most of us don’t even consider other options available like loan against assets, shares, gold, property and so on. It is strange considering gold finance companies have been on an overdrive in the last few years. Even moneywise, it makes perfect sense to take a close look at asset-backed loans.
Compared to the interest rate of 16% to 24% on personal loans, loans against assets come much cheaper at 12% to 14.5%. But the problem is you can’t club all these asset-backed loans in one bracket. “Each one of these asset-backed loan has its own advantages and disadvantages. You have to choose one of them only after analysing your needs in detail,” says Satish Mehta, co-founder and director, Credexpert, a credit counselling entity. And the needs could be — the purpose of the loan, documentation requirement, time you have and how much money you want to raise.
PURPOSE OF THE LOAN Loan against gold and securities work for relatively smaller amounts that you would like to pay off within a short timeframe. For example, if you are keen on a loan to fund your holiday, you may be better off borrowing against gold or securities. But for larger expenditures, like a marriage, loan against property works better. Typically, repayment tenure is longer for a loan against property compared to a loan against gold, which helps fund larger expenditures. For an average individual, market value of movable assets such as gold and securities is generally lower than the market value of the property. Hence in most cases large expenses are funded using loans against property. You can choose to take an overdraft facility against your house, where the bank approves the borrowing limit against a house. If you plan it well, you can use this facility to meet any contingency, too. This works for those who do not have much of free cash flow each month and cannot maintain emergency funds. Though you may not use the overdraft, still you may have to pay the processing fee of around 1% of the overdraft limit.
DOCUMENTATION REQUIRED Bankers differentiate between loans against movable and easily realisable assets, such as gold and securities, and loans against immovable and illiquid assets, like property. “In case of gold loans, lenders will be keen on ‘know your customer’ requirements than documentation pertaining to loan repayment ability,” says Harsh Roongta, CEO, apanapaisa.com. That is why the repayment ability criterion takes a backseat in loans against gold and securities.
But for a loan against property, the lenders will do the due diligence on the title of property and will also be keen to know the repayment ability of the individual. These make it a long-drawn process, involving a good amount of documentation. Individuals with poor credit history are generally denied loans against property but they are given loan against gold and securities.
“As lenders are sure about the realisable value of the collateral, they are more comfortable offering loans against gold and insurance policies,” says Madan Mohan, chief counsellor, Credit Vidya, a financial literacy and credit counselling entity.
HOW MUCH TIME DO YOU HAVE? If you do not have much time in hand, it is better to forget loan against property as it may involve couple of weeks, if not more. If you are in a hurry, go for loans against gold and securities. “A loan against gold can be arranged in a couple of hours, whereas a loan against securities may take a couple of days,” says Harsh Roongta.
THE CONVENIENCE FACTOR The issue with loan against asset is that you get only a fraction of the market value of the asset as loan. In the case of loan against property and other illiquid assets, it is the lower of the two – how much you can afford to repay and permitted fraction of the market value of the assets. Most banks offer up to 70% of the market value of gold and non-bank finance companies offer up to 60% of the market value of gold. In case of loan against shares, a diversified equity portfolio can raise a loan of up to 50% of the market value and in case of a single stock portfolio this loan to value ratio falls to just 40%.
“Price of gold is not as volatile as prices of individual stocks. You may be better off raising money against gold compared to a basket of stocks or mutual fund units,” says Satish Mehta. This is because if the prices of the underlying assets fall, lenders can ask for more assets or simply may choose to liquidate the assets.
If you have taken an overdraft against an asset, banks reassess the value of the asset and the repayment ability of the borrowers at regular intervals. For example, in case of overdraft against property, banks revisit the overdraft facility each year. Property prices have been rising for a long period of time and hence it may not be a risky proposition for both the borrower and the lender.
But the same is not true in case of overdrafts and loans against securities. If the portfolio offered as collateral includes shares, market value may fluctuate widely and banks monitor the ‘market value’ of these assets real time. You may have to answer margin calls in case of extreme volatility. From time to time risk management teams in banks may instruct not to lend against some shares. If your collateral includes such shares, the bank can come back to you asking for some other shares.
nikhil.walavalkar@timesgroup.com
Most people who have taken out title loan car are likely to be subject to the consequences of default as “more than half oF Auto loans default” due to astronomical interest rates.
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