Personal Loan vs. Alternative Loan options – Which is Better?

alternative loan, personal loan

At first glance, personal loans seem to be one of the easiest ways to use bank’s money. The general trend seen in the market is people often end up spending more than actually what they can afford. Personal Loans can be good if you think – in future you would have the capacity to pay high interest EMI on time, if not can lead to a vicious debt trap and ultimately affect your CIBIL report.

A personal loan is a good answer to your urgent need of money, but one must be aware of the cheaper options available in the financial markets which can help you avoid a debt trap.

Why not a Personal Loan?

Availing a personal loan and spending it is not the end of the story. Mind you, you have to pay it back to the bank. And if not paid, your credit history goes to CIBIL. CIBIL is Credit Information Bureau of India Limited, which acts like a central repository of credit information in India.

So if you are taking a personal loan from HDFC bank, then HDFC Bank reports to CIBIL about it. And if you miss out on any EMI (monthly) instalment, that gets reported to CIBIL. And if you have bad credit history with CIBIL, it can become utmost difficult for you to get any other loan like business loan, home loan and child education loan in future.

Money in the form of loan is required at various stages of financial life. A single mistake can prevent you from borrowing money from bank for some years.

And generally personal loans have the highest bad debt ratio because of high interest rate involved in them

Alternative Loan options

Some of other alternative loan options which you may consider when you are in urgent need of money are:

1. Loan Against Property

If you are a proud owner of the house, you have avail a loan against it. You can take a loan against your home if it is clear from any charge. One of the biggest benefit of preferring a loan against property over personal loan is the lower interest rate offered by banks in the range of 14-15% in case of loan against property and 18-22% offered in case of personal loans. The tenure of loan against property is generally long

Example: If you are looking for a loan of Rs 5,00,000 for a tenure of 7 years, at 14% rate of interest by pledging your property, you will have to pay a monthly EMI of Rs 9370.

But with options like a personal loan, when your interest rate shoots to 19% without pledging your property, your EMI would increase to Rs 10804 and you would end up paying additional interest of Rs 120,456 during 7 year period

2. Loan Against Public Provident Fund (PPF)

One of the best alternative loan options and ways to take care of your urgent need of money is pledging your PPF and getting a loan. In case, you are holding your PPF investments for long term and have the potential to fulfil your financial goals and don’t wish to liquidate them for tax benefits, consider pledging it (not liquidate) and get a loan against PPF.

You can take a loan against PPF from third to six year. The maximum loan available to you would be 25% of the balance in your PPF account at the end of second preceding financial year.The loan principal amount along with interest amount has to be repaid within 36 months from the sanction date. You have the choice to pay it in a single go or pay it by monthly instalments.

The interest rate charged for such loans is generally 12% if repaid within 36 months.

Learn all about public provident fund investments here

3. Loan Against Fixed Deposits

Loan against fixed deposits is another good alternative loan option to consider and is a much better option as compared to a personal loan. You don’t need to break your fixed deposits, but can pledge it and avail a loan.

You can get up to 80-85% of your balance in the fixed deposit account and the interest rate chargeable can be anywhere between 11-12% (generally 1.5-2% higher than fixed deposit rate).

This works well if you need money urgently and that too for a shorter duration of time. Banks offer such type of loans only if you are maintaining your fixed deposit for a long time with the bank

4. Loan Against Securities

You can also enjoy the capital gains on your securities in the form of shares and mutual funds and can also pledge them and take a loan without liquidating them. For availing such a loan, you must be a resident of India and you can pledge your securities from the banks approved list of certain blue chip shares and mutual funds.

Such securities should be in the name of the eligible borrower. Securities in the name of trusts, minor, partly paid up shares in the name of the individual are not accepted. Banks generally revalue your portfolio on a weekly basis and conduct a interim revaluation in case of steep fall in equity markets.

If you are holding a single stock or mutual fund in the portfolio, you can get loan upto 25-50% of the current value of the stock or mutual fund

5. Borrow from relatives or friends

Though this option is one of the most difficult alternative loan option to consider whenever you are in urgent need of money, but if managed well can prove to be one of the most viable option. Generally these type of lenders give you loan on more generous terms as compared to bank.

You don’t have to pay any prepayment charges in case you want to pay off your debt sooner than promised. Make sure that if the amount of loan from your friend is in Lakhs, you must consider having a written document to avoid any complications in the future.

Another thing which will help you borrow from your relative and maintain a good relation with them is by repaying the loan much before the promised date.


About the Author

Vaibhav Sangli is an MBA Finance who loves to write on several topics including insurance and mutual funds and finding out different ways to earn and spend money.

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