Investments form an integral part of our financial portfolio not only for building wealth, but also to bail us out in times of crisis. The immediate course of action when in need of credit is to break or stop our investments. However, sometimes we may just need a small amount compared to what we will be giving up if we break our investments.
In such a scenario, one can contemplate relying on investments that can be used as collateral for loans, which when repaid can effectively release the investment. Not all investments can be used as loan guarantees though. Let’s find out some of the best options that are widely accepted as collateral for secured loans and how you can use them.
The most common collateral used as mortgage are property deeds. Property can be both residential and commercial, but the loan will only be given to the deed holder or at least one of the co-applicants should be a deed holder.
Property papers ideally should be used as loan guarantees for higher amounts needed in cases of education, home purchases or business funding. These loans are secured loans and thus may have a slightly lower rate of interest.
You must remember, though, that if the borrower is not able to pay the loan fully, the bank or the financial institution can take possession of the mortgaged property. There is, however, legal protection against such possession if the amount owed is not as much as the value of the property. So make sure to contact your financial advisor and lawyer in such a case.
2. Non-Term Life Insurance
All life insurance policies are not eligible for loan. Unit-linked insurance plans and term insurance policies are not eligible for loans, according to IRDA guidelines. But loans can be taken on traditional insurance policies such as endowment and money-back plans. Hence, it is important to check the type of your life insurance policy you have and whether it is eligible for loan against it.
If you have a life insurance where the sum assured is Rs 10 lakh at the end of the tenure, you won’t be eligible for a loan of Rs 10 lakh. In fact, the loan amount depends on the surrender value of the policy. Surrender value is the present value of the policy when you terminate the plan voluntarily. In most cases you may be eligible for a loan amount of a maximum of 80 to 90 percent of the surrender value and no bonus component is taken into consideration.
3. Government Bonds
It is wise to build portfolios of bonds, deposits, equity shares and mutual funds combined so that in times of need some of these can be used as guarantees for debt. Of these government bonds like NABARD, Sovereign Gold Bonds and more can be used as collateral when trying to secure a loan. Although bonds are not as liquid as some other securities, they are a highly reliable security as they are issued by the government whose creditworthiness ranks high among lenders.
4. National Savings Certificate
NSC holders can avail loans against their certificates easily as most banks do not question the need for a loan. The interest rate charged on loans against NSCs can be lower compared to traditional personal loans.
The quantum of loan one can avail depends on the bank which an individual approaches, with loan amounts varying according to individual policies in place. Banks offer loans up to 85-90% of the NSC value, with the amount changing with changes in tenure of certificates. Certificates which have been in force for over 3 years stand to get the largest sum. Borrowers also have the option to repay the loan in advance, before the tenure ends.
5. Fixed Deposit
The bank will issue you a loan against your term deposit by using it as a collateral. Apart from this, the interest rate charged for loans taken against your term deposit will be much less when compared to traditional loans.
A personal loan against FD is easy to obtain and the process generally takes less than one day. The individual has to submit a duly-filled application form, fixed deposit receipts and other documents such as pledge/lien letter and overdraft agreement as notified by the bank.
(The writer is CEO at Bankbazaar.com)