Investment in financial products like Public Provident Fund (PPF), mutual funds, life insurance not only helps create long-term wealth, but can also act as a contingency fund as one can avail loans from banks or non-banking financial companies against them in case of any emergency. The interest rate on loans against these products will be much lower than personal loans and disbursment will be quick.
Loan against PPF
A PPF account holder can avail loan between the third and sixth financial year after opening the account, of up to 25% of the outstanding balance at the end of the second year preceding the year in which the loan is applied for. For example, if the loan is applied in 2016-17, 25% of the outstanding account balance at the end of 2014-15 will be considered for the loan. No loan can be taken from the seventh year onwards, as it will be partial withdrawal. The interest rate will be 2% more than the current interest rate applicable on the PPF account. As the current rate of interest on PPF is 8.1%, the loan interest rate against PPF will be 10.1%, which is much lower than the 18-24% charged by banks for personal loans. The borrower can repay the loan in 36 months and one does not need to mortgage anything.
Loan against mutual funds
Banks and NBFCs offer loans on the value of units held in the folio of an investor’s mutual fund account after seeking a lien on the units in the name of the bank. Once the loan is repaid, the bank will lift the lien and the investor gets the rightful ownership of his mutual fund units. Lien gives the bank the right of ownership to hold or sell the funds. To request for a lien transfer to the bank, the investor will have to request the fund house for a lien on his units in favor of the bank.
For equity-based mutual funds, one can get as much as 50% of Net Asset Value (NAV) as loan amount. The interest rates for loan against mutual funds is lower than personal loans and is decided by the bank after weighing the risk in each application.
However, not all mutual fund units are eligible for a loan as it is given against a list of approved mutual funds or schemes as determined by the lending bank. An investor cannot redeem any units during the loan tenure and if he defaults on repayment, the bank can invoke the lien and redeem the units for loan repayment.
Loan against life insurance
While life insurance protects your family and finances, the policy can be used to raise a loan. It is an ideal tool to monetise a long-term financial security instrument for short-term financial needs.
The loan is given by banks against traditional life insurance, including endowment and money back features and even linked policies. However, banks do not give loan against term plans.
A policyholder can take a loan against the surrender value of a whole life insurance policy if he has paid premiums for at least three years. The loan amount will be decided on the surrender value, which can be up to 80% against traditional plans with guaranteed returns. For linked plans it will be on the fund value. The interest rate will depend on the premium already paid as more the premium amount and number of premiums paid, the lower the rate of interest charged. The loan has to be repaid during the term of the policy.