Loans

Four financial assets against which you can avail a loan

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Written by Publishing Team

Gold is not the only financial asset that you can pledge for a loan in time of need. Fixed Deposits (FDs), PPFs, Insurance Policy and Mutual Funds (MFs) can also be used for a loan. Moreover, a loan on such assets is cheaper than a personal loan.

Fixed Deposit (FD): Banks grant overdraft (OD) facility on deposit contracts of up to 90% of the FD value. The interest rate is 0.5% to 2% higher than the interest on the FD and there is no repayment period where you can repay the borrowed money as long as you own the FD. Keep in mind that you cannot borrow against 5 years of your tax-saving tax return.

PPF: The loan facility on the balance of the Public Provident Fund (PPF) comes loaded with several conditions. You can avail a loan on your PPF balance only from the third year of account opening until the sixth year. The maximum amount you can borrow is 25% of the total available balance in your PPF account immediately prior to the fiscal year in which you apply for the loan. As for the interest rate, 1% is charged, but the PPF balance equivalent to the loan taken does not earn interest until the loan is repaid. The loan is repaid within 3 years, otherwise an interest rate of 6% will be charged on the loan.

MF/Stock: Typically, banks give 50-70% of the stock market value or NAV to mutual funds (MF) as a loan. The interest rate on these loans ranges between 10-12%. Adil Shetty, CEO of BankBazaar.com, said that not all stocks or MF holdings can get a loan. Banks have their own list of securities that they take as collateral. They usually take into account factors such as market value, fluctuations in stock price and stock liquidity to make a decision and the loan amount can fluctuate with market fluctuations. If the value of the stock falls, the lender may ask you to raise the value of the security by mortgaging more shares or renew by putting in the required cash.”

ELSS funds cannot be pledged for a loan.

insurance: Conventional policies can only be pledged for loans and only after 3 years of starting the policy. You can borrow up to 90% of the assignment value of the document at 9-12% interest. If the policyholder dies before the loan is repaid, the remaining loan amount is deducted from the claim amount.

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