You’ve got an urgent cash requirement, but you don’t have enough resources at your disposal to cover it. What do you do? Borrow from friends or family. Right?
While we agree that this is probably the most readily-available option to meet your out-of-the-blue cash requirements, there are other options that you can consider as well. Let’s explore each of them, shall we?
During pressing times, taking a Personal Loan seems to be the most sought-after option. Besides, a Personal Loan can be taken for any personal requirements.
Also, Personal Loans are unsecured loans and usually do not require a guarantor. The application process is pretty quick as well, especially with paperless approvals being the new trend. Documentation is minimal, approvals are fast and you can expect the cash to be credited in your account within days (if you’re lucky, you can get it in a day!).
There are some disadvantages to a Personal Loan too. Like, for example, the interest rate charged by banks for a Personal Loan is higher than the other loans we’ll be talking about.
But, if you’re looking for a Personal Loan, we’ve great offers to choose from. Check us out, maybe!
Additional Reading: 5 Tips To Avoid Personal Loan Perils
After Personal Loans, Gold Loans are the next most popular option to meet sudden financial emergencies. But, unlike the former, Gold Loans come with lower interest rates. The interest rate on Gold Loans depend on two factors – the value of the gold being pledged and the amount you’re borrowing.
How to take a Gold Loan? Gold ornaments and coins can be pledged for cash at banks or companies like Manappuram Finance or Muthoot Finance that deal with Gold Loans.
Apart from lower interest rates, these loans also have an edge over Personal Loans when it comes to the processing of the loan. Your Gold Loan is likely to be granted within 24 hours. In addition, there are no processing fees attached to them. Paperwork is also simple – you just have to provide an ID proof and address proof in most cases.
Additional Reading: Gold loans – Quick funds at lower interest rates!
If you’ve invested in a long-term FD, you can apply for a loan against it – also referred to as an overdraft on Fixed Deposit – instead of breaking it. You won’t be able to choose the loan amount though. Usually banks provide up to 75% or 80% of the amount in your FD as loan.
Interest charged on loans against Fixed Deposits are usually restricted to 1% or 2% more than the interest rate on the FD. For example, if your FD was earning an interest of 7.5%, your loan against it will be charged at 8.5% or 9.5% and you’ll have to repay the loan before your Fixed Deposit account matures.
If you’ve been wise, you would have made investments in Mutual Funds, shares, bonds, NSC, Insurance policies, etc. And if you have, then you’ve got one more alternative to fall back to when you are in dire need of cash.
You wouldn’t need to liquidate your investments. Instead, you can use them as collateral to obtain a loan from leading banks and financial institutions. However, not all your investments will fetch you a loan. Banks and financial institutions have a list of approved investment companies/products on which they provide loans.
Also, since these investment products rely greatly on market fluctuations, you would be offered a loan that is lesser in value than the total value of your securities. For example, if you’ve invested in securities worth Rs. 10 lakh, the loan amount offered will be much lower than Rs. 10 lakh.
You can also get a loan against your insurance policy. Pledging your insurance policy can fetch you a loan of up to 90% of the present surrender value of the policy. However, you can get this loan only if you’ve paid your premiums regularly for three years or more.
The interest rate applicable on these loans ranges from 9% to 13%. And you will have to wait for up to two or three days for this loan to be sanctioned.
Additional Reading: How to Take Loan on your Insurance Policy: A Vegas Take
Home Loan Top-up
If you already have a Home Loan from a bank or financial institution, you can apply for a top-up loan to cater to financial emergencies. Most banks will provide a top-up loan only after 6 to 12 months on your Home Loan or after a few years of a good repayment record.
Wondering how much you can borrow? Well, most banks will provide only 70% to 75% of the present value of your property minus the outstanding Home Loan amount.
For instance, if the present value of your property is Rs. 75 lakh and you have an outstanding loan amount of Rs. 50 lakh, then you’ll be eligible for a top-up of Rs. 10 lakh to Rs. 12.5 lakh. The final loan amount is decided by your bank.
As far as tenure is concerned, you are expected to clear the top-up loan EMIs along with your Home Loan EMIs. So, if you have another five years remaining on your Home Loan, your top-up should be cleared within the five years too. The interest charged will be 1% to 2% more than the interest rate on your Home Loan. Banks may charge a processing fee on the top-up loan as well.
The best part is that you can use the top-up loan for anything – buy a new car, pay off your other debts, renovate your house, fund a vacation, etc. The bank will not ask any questions. However, in some cases, they may require an undertaking specifying the use of the funds so that you won’t use it for any illegal activities.
Also, you can avail tax benefits on your top-up loan under Section 80C for principal repayment, and under Section 24 for interest payments, provided you use the loan towards either the purchase or construction of a new property.
Additional Reading: An Overview Of Top-up Loans!
Borrow From Your Employer
Some companies provide loans to their employees, which will be adjusted against their monthly salary over a period of time. You can also request your employer for a cash advance on your salary when there’s an urgent cash requirement.
And if none of the above works out, then your last resort is to borrow from your friends or family. You wouldn’t have to pay any interest on such transactions (or at least we hope so!). But, ensure that you pay it back as soon as you can. After all, money matters are pretty sensitive and it can destroy relationships.
Additional Reading: Borrowing Money? Choose The Right Repayment Option
You wouldn’t have had to depend on any of the above options if you had created an emergency fund to take care of unexpected expenses. Ask any financial advisor and they’ll tell you that the first thing you need to do when you start earning is to create an emergency fund (also known as a contingency fund).
An emergency fund should consist of at least three to six months (the more, the better) of your expenses. You can stash away this fund in a Savings Account (this is the easiest option).
However, if you want to grow your money and not let it stagnate, then you can opt to store this money in a Fixed Deposit (provided you can break it at short notice), Liquid Funds or Short-term Debt Funds. The key is to stash your Contingency Fund in an easily accessible investment avenue.
Also, remember these two things when it comes to emergency funds:
- Always review your emergency kitty at least once in a year (especially when you get a salary raise). You need to replenish it to keep up with changing times and rising expenses.
- Do NOT withdraw from your emergency fund unless it is an emergency situation. Since these funds are easily accessible, people tend to pull out a few bucks for unnecessary purchases, promising themselves that they’ll replace what they’ve spent as soon as possible.
Bonus Read: How To Build An Emergency Fund
Anyway, the point we are trying to make is that financial emergencies can happen at any time, anywhere. It is always better to be prepared beforehand to tackle such situations.
If you haven’t bothered to prepare for them, we have listed out the different options available in the market to help you tide through difficult situations. Good luck!