1. Time to move towards alternative lending options

Time to move towards alternative lending options

Lending options today have grown beyond traditional home loans, personal loans or automobile loans. There are some new and innovative loan products...

By: | Updated: November 24, 2015 3:25 PM
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Lending options today have grown beyond traditional home loans, personal loans or automobile loans.

Lending options today have grown beyond traditional home loans, personal loans or automobile loans. There are some new and innovative loan products offered by banks and private platforms, which are broadly classified as alternate sources of lending.

Loan against car

Not many car owners are aware that they can raise a loan against their car. Instead of a high interest rate personal loan, you can take up a secured loan by mortgaging your car with the bank. Banks have the right to accept or reject your loan request based on your car’s condition and age. Usually, banks accept cars within 5-6 years  of purchase and offer around 70-85% of the current value of the car, depending upon its condition.

Loan against securities

Your shares and mutual fund investments are your financial assets, helping you compound your money with time.

However, when faced with a financial emergency, you can take a loan against them through your bank. You continue to earn any dividends that you may get even if you take a loan against your mutual funds mortgaged with the bank. Banks accept shares, bonds, insurance policies, and mutual funds as mortgage and lend up to 70% of it, based on its value and risk profile.

Peer-to-peer lending

Imagine a situation where you borrow small amounts from a number of people instead of borrowing a huge lump sum from your bank. Peer-to-peer (P2P) funding connects ‘lenders’ to ‘borrowers’ directly as people lend money to each other depending on the reason for borrowing. Usually, start-ups and entrepreneurial hopefuls, who would otherwise not get a loan from banks, opt for P2P funding. There are online as well as offline P2P lending platforms, which manage collecting voluntary contributions from its members and offer it to the applicant by taking a processing fee from the borrower.

Crowd sourcing

Crowd funding works on the same principle as that of P2P funding, except that it is regulated by Sebi. As per Sebi guidelines, companies can raise a maximum capital of R10 crore in a year through crowd sourcing. Crowd-sourcing platforms are more suited for companies to raise funds for expansion or for individuals who want to set up a business or are seeking sources for a new project.

Alternative loans and interest rates

Many look at alternative loans with suspicion and assume they may charge a high rate of interest. There are no reasons why alternative loans would have a higher rate of interest. In fact, such loans are sometimes better than traditional ones.

For instance, if you opt for a personal loan, the unsecured nature of the loan means you will be charged higher than a loan against car which is a secured loan. A leading private sector bank, for example, charges a rate of interest of 14.5% for loan against car, as compared to 15.5-24% for personal loans.

So, do not limit your focus to just traditional loans. Do your homework on alternative lending availability as per your need, then compare interest rates of loans offered by alternative lending sources. Your credit score plays a significant part whether you opt for a traditional loan or an alternative loan. Do ensure  your credit score is high at all times.

What it it?

* Instead of a high interest rate personal loan, you can take up a secured loan by mortgaging your car with the bank.
* Usually, banks accept cars within 5-6 years of purchase and offer around 70-85% of the current value of the car, depending upon its condition
* You continue to earn any dividends that you may get even if you take a loan against your mutual funds mortgaged with the bank
* Crowd-sourcing platforms are more suited for companies to raise funds for expansion or for individuals who want to set up a business

The writer is CEO, BankBazaar.com

 

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