Borrow wisely: Options to consider for borrowing in pandemic-affected times
Ongoing economic and pandemic-related challenges have pushed household finances to the brink for many. Many have had to dip into savings to meet ends; many others have had to borrow.
Borrowing is relatively straightforward for the privileged few whose incomes have been stable through the pandemic. The borrower’s financial stability assures lenders that their loans will be repaid on time. But for those without stable income or a good credit history, opening a new line of credit is relatively tougher.
The income instability signals to lenders that you may struggle with your repayment, and the weak credit history says you’ve had problems with loan payments before.
A stable income and a good credit score allow you to borrow at low interest rates. If you don’t have these, you could still borrow — but the rules of the game change.
Here are some options you could consider as you look to borrow in these pandemic-affected times.
These are term loans without any collateral or guarantees, typically given to borrowers with steady incomes and good credit scores upwards of 750. The bank where you have your salary account has most likely already created a pre-approved offer for you.
You could contact the bank, access your netbanking website or app, or check loan aggregator platforms to know about your pre-approved offers.
You’ll need to meet the lender’s eligibility criteria such as stable income through salary or pension above a defined limit (for example Rs 30,000 a month). If your credit score is low, you could still get a personal loan. However, your may have to pay a much higher rate of interest.
Several public sector banks have created unsecured loans for customers looking for liquidity to deal with their Covid-related problems. One large government bank has, for example, announced a loan of up to Rs 5 lakh with a three-month moratorium. The repayment needs to be done in 57 months after the moratorium. The loan is given to salaried and non-salaried bank customers or pensioners who’ve had covid cases in their family after April 1, 2021. This is a collateral-free loan aimed at making it easy for Covid-impacted borrowers to meet their medical expenses.
Credit card borrowings
A credit card is a versatile credit line. During a financial crunch, you could meet short-term needs by shopping with your card and paying only minimum dues (normally 5 per cent of the total outstanding).
Once you have liquidity, pay your dues as a lump sum. Don’t forget that the interest rate on your credit card (3-4 per cent a month) is much higher than a personal loan (typically 9-24 per cent per annum). Therefore, quick repayment is key to stop the snowballing of debt.
If you don’t have a credit card but have a good credit score and stable income, you can apply for one with a preferred bank after due comparison of features. If you don’t have stable income or a good credit score, you could take a card against a fixed deposit with a spending limit of up to 90 per cent of the deposit.
Home loan top-up
This is a smart way of borrowing but often overlooked. If you have an ongoing home loan towards which your payments have been regular, you could approach your lender for a top-up loan. This would allow you to borrow over and above the home loan through the same loan account.
The advantage? You’re borrowing from the same lender and, therefore, can avoid much paperwork. Being a secured loan, it’s also cheaper than a personal loan or credit card debt. For example, a large private lender sells home loans at 6.75 per cent and home loan top-ups at 7.60 per cent. With this, you have a single consolidated, low-cost loan that will be easier for you to manage.
Loans against property
Loans can be taken against fixed deposits, shares, mutual funds, gold, and immovable assets. These are typically for borrowers with unstable incomes or poor credit scores which make it tougher for them to get other kinds of loans.
When the borrower provides a security, the risks to the lender reduce. If the borrower is unable to repay his dues, the lender can simply liquidate the security to recover them. Each lender, be it a bank or a non-banking financial company, has its own terms and conditions.
Against gold and fixed deposits, it may be possible to get up to 90 per cent of the asset’s value as loan. With market-linked securities such as gold, mutual funds, and shares, a fall in prices would lead to an increase in the margin money requirement, which you’ll have to fulfill.
With any loan — secured or unsecured — there is the obligation to repay in full. In collateralised loans such as gold loans, non-payment can lead to forfeiture of the security. Full and timely repayment would help your credit score, making future borrowings easier.
A loan could meet your funding requirement and can bail you out of an emergency. However, irregular repayments could complicate matters and deteriorate your financial health. So carefully compare your options and evaluate the affordability of repayments before taking a decision.
The writer is CEO, BankBazaar.com