The Fixed Backup For Emergencies

Need a large amount of money swiftly? Your home, or other major assets, could provide the loan in times of need
Emergencies, like troubles in the Hindi saying, come unannounced. So to what can you look for an immediate, reliable fund source during an emergency? A good option is your own property.
Sakharam Aachrekar, 52, teacher from Mumbai says, “I took a loan against my South Mumbai property for my daughter’s treatment. Since the amount was large, banks were ready to give a secured rather than an unsecured loan. It was also cheaper than a personal loan.”
Loan Against Property (LAP) is taken against the mortgage of property you own (self-occupied residential or commercial property), provided it has not been put up as security for any other purpose.
Choices. You can take the full loan amount as a lump sum as in Aachrekar’s case, repaying it as an EMI, or take it as an overdraft account. This allows you to draw more money than your available bank balance.
Harsh Roongta, CEO, Apnaloan.com says, “With overdrafts, you save on interest by depositing the money in a bank.”
“A lump sum loan attracts half a percentage point lower interest than an overdraft. With an overdraft, you pay an annual fee, compared to lump sum loans where you pay it at once. An overdraft makes more sense,” Roongta says.
Choose an overdraft facility; it lets you use funds when needed, and thus you pay lower charges.
A LAP can be availed for any need, but it has a risk involved. You should devote time, effort and resources before taking a loan against property, especially house. Many take it to buy an appreciating asset like real estate, as Sanjay Sharma did. The 34-year old Delhi banker took a loan against his house to invest in real estate.
“I wanted a long-term loan with a lower interest rate and a manageable EMI. I chose a LAP for a Rs 5 lakh loan, and a 15-year term at 13 per cent interest, which is less than for a personal loan,” says Sharma. As lump sum or overdraft, LAP is a better deal than a personal loan.
Cheaper. A LAP is cheaper compared to a personal loan. The interest rate is 12.5-15.75 per cent for LAP compared to 12-25 per cent for personal loans.
Fixed or Floating. With some banks, you can choose between fixed and floating rate loans. In the former, the interest rate is constant throughout the loan tenure, while for a floating rate loan interest is adjusted with the changes in banks’ floating reference rates.
Larger amount. The maximum amount you can get in a personal loan is Rs 10 lakh. With a LAP you can get a loan of between 40-75 per cent of the property's market value. Some banks are known to offer loans up to Rs 3 crore.
Longer tenure. The maximum tenure of a personal loan is about 72 months. A LAP's term would be 15 years. The tenure is subject to your age of retirement, or on your turning 65, whichever is earlier.
Processing and prepayment fees. Processing fees, which vary from bank to bank, are between 0.25-2 per cent and in most cases are non-refundable.
If you want to pay off the loan before the full term, you have to give a prepayment fee, between 1 per cent and 4 per cent of the loan amount. Says Roongta: “Processing and prepayment fees can be negotiated. Some banks waive off some of these fees after negotiating with the applicant on certain occasions.”
Your payment history matters. Today, banks use the Credit Information Report (CIR) brought out by the Credit Information Bureau of India (CIBIL). Getting a LAP or any other loan approved largely depends on a clean credit history.
Here are a few things you should keep in mind before finalising the loan:
Contact several lenders and compare their respective interest rates (see Interest Rates on Loan Against Property).
The EMIs should be affordable for the entire tenure without missing payments.
Check if the LAP offers any insurance on your loan.
Know the penalty for late or missed payments of the EMIs.
Find out if there are any prepayment fees and if they can be waived.
Some Banks give a “loan back guarantee offer”, under which you can return the loan amount within a fixed time, if you decide the loan is no longer needed.
Alternatives. You can also borrow against other assets.
Loans against securities such as equity shares often give instant liquidity. The shares need not be sold: merely pledging them in favor of your banks gives you an overdraft facility against them, where you get up to 40 per cent of the value. You continue to get all shareholders' benefits.
With mutual fund units you get up to 40 per cent of the net asset value. LIC (non-term) and private insurers' policies, National Savings Certificates (NSCs) among others can be pledged.
Gold is another good option. Kanwar Vivek, general manager, ICICI Bank, says: “Loan against gold fulfills short-term financial needs. Given the low credit rating required for gold and income proof not being needed, it is a cheap and convenient option.” You can get a loan of up to 70 per cent of the value of your gold, at an interest rate of 12 -13 per cent.
You can take a loan against your vehicle, for up to 80 per cent of its value. The tenure is usually 12-60 months and interest rates for different car models vary from bank to bank.
Gaurav Mashruwala, a Mumbai-based financial planner says, “The sequence while mortgaging assets is based on increasing order of importance of the asset: car, shares, gold, life insurance policy, and lastly house. Loan against house is to be to be taken only in emergencies."
Taking a LAP is an easy process. But remember to make payments regularly. If you fail to repay you could lose the asset, in this case your home