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Denied a Personal Loan? Check Out these Alternate Loan Options

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Ankit, a 43-year old salaried professional, had required Rs. 80,000 for a financial emergency. Since he did not want to take favour from either his relatives or friends, he had applied for a personal loan. But his loan request got denied due to insufficient credit score. So what should he do next? Should he break his fixed deposit or sell his car? Well neither of this would be necessary if he would just look into the other available options.

There are a lot of other people like Ankit who get denied for personal loans due to several reasons such as insufficient credit score, low income, inadequate professional experience, etc. In such a situation, you must not lose hope as personal loan is not the last resort, especially if you have assets and other investment options to pledge as collateral. Let’s have a look at some of the alternate sources of lending in case you are not eligible for a personal loan:

  • Loan against Fixed Deposits

Fixed deposit is a common financial instrument, especially among risk-averse investors. Availing a loan against it can help you get out of your financial crisis at low interest rate, which usually varies from 1% to 2%. The loan option requires minimal documentation and less than a day to process. Banks generally offer loan facility of up to 90% of your FD value. However, the exact percentage may differ from one lender to another.

Some people prefer to withdraw their fixed deposit amount prematurely instead of opting for a loan against it. While it might be suitable for some cases but mostly it is not recommended. This is because by doing so the depositor not only loses on the interest that he earns on it but also has to pay a penalty for making premature withdrawal. Moreover, by availing loan against FD, your FD amount continues to earn interest even during the loan tenure.

  • Gold Loan

If you own gold, then gold loan is another viable loan option that you can consider to fulfil your immediate money requirements. Gold assets in the form of ornaments and coins (the weight of the coins must not exceed 50gms) are accepted as collateral by banks and NBFCs, however, bullion such as gold bars is not accepted as of yet.

The loan’s interest rate goes as low as 9.25% and the tenure usually goes up to one year. Since the loan amount usually depends upon the gold’s value and not the repayment capacity of a borrower, it often comes to the rescue when money is required urgently.

The loan also includes minimal paperwork and lenient eligibility criteria, therefore offering speedy disbursal. Further, it mostly includes no processing charges and pre-payment penalty (if closed at a specific period). Lending institutions offer loan of up to 75% of the actual value of gold, excluding the making charges and taxes paid for purchasing them. The loan amount also depends on the purity of gold. Gold articles without a purity certification may attract a high cut in its value.

  • Loan against Property

Loan against property is yet another loan option that can be availed in place of personal loan. In this type of loan, you can mortgage the property deed of residential and business properties or plots to a creditor who in return lends you a certain percentage of the market value of the property. Since it is a secured loan, therefore, it has slightly lower rate of interest, which starts at 8.40% and is subject to change with the government and bank policies. Banks and NBFCs usually give loan up to only 60% of the actual value of property.

This type of loan is recommended if your fund requirement is huge and you have no other source to fulfil it. So if you default on your loan, your lender might sell it to cover the outstanding loan amount. There is also, however, legal protection against such possession, which must be checked with your financial advisor and lawyer. Also, before pledging the deed make sure that the title of the property is clear of any charges or claims.

  • Loan against Car

Do you own a car? If yes, you can use it to secure a loan against it. As compared to other lending options listed in this article, loan against car is relatively new. In fact many car owners are not even aware of the fact that they can take loan against their cars. While many banks are not promoting the loan option aggressively, some popular banks where you can avail this type of loan are ICICI Bank, HDFC Bank and Kotak Mahindra.

The interest rates applicable on this loan type can go as high as 18%. Like in other loan options, this loan option is also sanctioned at the discretion of the banks. They might accept or reject your loan request on the basis of your car’s condition, age, popularity of the model, etc. More often than not, banks accept cars within 5 years of purchase. Creditors have their own list of models that they will accept as collateral. Usually banks offer about 70% to 85% of the current value of the car. Customers can even get a top-up loan against cars. The disbursement of this type of loan is fast and the documentation requirement is also similar to any other loan.

  • Loan against Securities

Your securities such as demat shares, term deposits, bonds, insurance policies and mutual fund units help you compound your money with time. And when faced with financial crisis, it comes to your rescue in the form of loan against securities. These loans include an overdraft facility that is allowed on a current account with a borrowing limit set on the basis of the collateral value. You can withdraw money from this account and also repay the loan by depositing the amount back. This loan option is apt for investors who need money but do not want to sell off their investments. Even if you take loan against one of your securities, you will continue to earn the applicable returns on it.

A lot of banks offer this credit option and lend up to 90% amount, based on the type of security you are using as collateral, its value and risk profile. For instance, in case of Loan against Equity Mutual Funds, banks usually offer loan up to 50% of the NAV (Net Asset Value). Since the interest levied on this loan option is based on the outstanding balance in the account at every month’s end, it is generally cheaper than personal loans.

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