Leverage is no more a bad word but just a part of life. Be it consumption or business or investing, many of us leverage and it has its own benefits but it also attracts costs. Hence, when we leverage there is a need to carry out a cost benefit analysis. Obviously, keeping the costs lower and maximising the benefit is the game.

Money leverage is common in life. Loans are taken to satisfy consumption and speculative or investment motives. There are many who carry out businesses on the basis of loans. There are many smart ones among you who intend to go shopping on Dalal Street, especially when the markets go down, like the one we are experiencing now. Some of you may want to invest into your business using the borrowing route.

Many a times, getting a business loan or getting a loan to invest into shares and to go for speculative bets is not possible. Sometimes even though we manage to get loan, the costs involved reduce the benefits to such an extent that the entire activity leaves little scope for us to take the risks involved.

Consider an instance, a bank is willing to extend you a personal loan at a whopping 23% per annum on reducing balance for a time period of three years and the repayment is to be done through equated monthly instalments (EMI). If you are estimating a 20% return from the stock market over next three years, then there is less to talk about. However, this sounds being overly optimistic when many foreign institutional investors are talking about the end of the four-year dream bull-run. But, for sure, the cost of funds will dampen the idea of borrowing for the purpose of investing. Some of you may defer your business investment plans if the rate of interest quoted is in excess of 20%, whereas some of you will compare it with the rate of interest quoted in the unorganised sector and go for it. But a low rate of interest is what everyone wants to ensure that the costs remain low and the benefits are sizable enough.

One product you may consider is the loan against an asset. There are bankers keen to lend money against your assets than otherwise. The assets against which you will get loan include home, gold and even your cars. With regard to the costs that you incur on the asset-backed loans, you are better off than a personal loan or a business loan.

A banker will charge you about 13-14% floating rate of interest for a three-year loan against property. The amount of loan is a function of the value of the asset you are offering as collateral. Some banks will offer 75% of the fair value of the house you own. Some bankers offer 50% of the fair value of the car you own. In other words, the assets that do not earn money for you may be helpful for raising funds. The personal loans have cap on the maximum amount you can borrow. The loan against property, however, does not have such limits. The banks are also comfortable extending money to you when they are offered collateral. In such asset-backed loans the banks have an option to sell off the asset and recover the money in case of default. Thus the risk involved being low, the bankers are keen to offer loan at a relatively lower rate of interest when compared to a personal loan not backed by a collateral.

However, this option is good if you choose carefully from the various options available in the market. Banks differ on loanable value of the property. The ratio of loan amount to property value also varies with different banks. You further need to check the exit routes. Some of the bankers charge very high prepayment fees.

For example: You have a property, which is financed by a bank. You have a few instalments left and you don?t think that the tax break is important. You can approach your bank to raise funds against that property. The bank charges you the rate of interest for the loan against property and not rate of home loan. Needless to say, the rate of home loan is lower than the rate of loan against property. The balance home loan to be repaid and the new amount of loan raised are clubbed together and you have to pay EMI as per the revised terms and conditions of the loan. Also, you lose the tax break that you enjoy on a home loan when you have your home loan converted into loan against property.