In Urgent Need Of Funds! Find solution to all your W(When, Which & What) Loan

Posted by Ushali mishra on August 30th, 2019

In Urgent Need Of Funds! Find solution to all your “W”(When Which & What) Loan to To Apply.

 Emergencies are part and parcel of life and are always unexpected in anybody’s life. And so are they unavoidable too. In a situation-Particularly for the financial imbalances and when in urgent need of funds, it’s a human tendency that people tend to lose to the situation, most of them land up taking fast disbursement loans preferably with higher interest rates, thus adding to their higher obligation by paying increased EMI’s. Though it helps them to curb the present financial situation but for many, it later increases the burden of financial imbalances. Therefore before taking any hay-way decision it is very important to analyze the money requirement and then accordingly apply for a suitable loan product.

Money requirement can be analyzed on the various components like, the urgency of funds, time involved to avail the same, which loan providers to approach on the basis of the cost incurred, rate of interest, repayment tenure, eligibility criteria, closure conditions, etc.

So let’s today, see the simple step by step guidance before procuring financial aid to suit our multiple needs. To simplify and understand better let’s take an example of Mr. Ashwin who suddenly gets into financial urgency for a sum of 10lacks. He is 30 years young entrepreneur who has a home loan of 75lacks from Bank A and a business loan of 25lacks from NBFC. His immovable assets include one residential property and one commercial shop, ITR filled is 5 Lakhs, & operates a current a/c with bank B. Banking transactions is 1 lakh per month.

1) Look for Top-up loan – A top-up loan is the easy and the fastest way to receive the funds for meeting immediate requirements. Top-up loan means borrowing additional loan to your already existing loan. Top-Up can be taken on a home loan, mortgage loan, car loan, business loan and also on the personal loan.

Top-Up on the home loan and mortgage loan should be an individual’s first choice because it is quick and faster compared to processing of other lines of loan product, requires minimal documentation and importantly comes with a relatively low rate of interest.  But to take a top-up the applicant must be:

 a) Eligible for the top-up loan amount.

b) & is subject to the Market Value of the property, which should suffice the loan amount.

The cost involved in taking top-up on property loan is usually 0.50%-1% of the loan amount. The processing time required is 7-10 working days. The only difference between home loan and mortgage top-up is the difference in the rate of interest. The mortgage rate is higher than the home loan rate.

Secondly, top-up loan on the personal loan, business loan and car loan can also be an optimal choice for those who do not have any home or mortgage loan and for those who are looking for an immediate money source. Though the processing time is advantageous in this type of top-up loans (processing time taken is only 3-5 working days), it is considered as an alternate choice because of the major difference in the rate of interest and the processing fee cost. The rates are high in comparison to the home & mortgage loan top-ups, also the processing charges are nearly 1%-3% of the loan amount. Foreclosure charges of 2%-5% are also levied on the loan amount.

Therefore in our case of Mr. Ashwin, he is suggested to approach his home loan bank and apply for a top-up loan on home loan instead of top-up on his business loan as it gives him an advantage of longer repayment tenure along with no penalty on pre-&-part payment of loan.

However, it is important to note that NO top-up loan qualifies for tax benefit. However if one has a legal documentation/receipts which provides evidence where a top-up amount is used for renovation, repairs, construction of the residential property, the top-up taken on the home loan will get the tax deduction benefits.

2) Opt for a Mortgage Loan. The mortgage loan is the secured loan. If the rate of interest, is what is the concern along with paying lower EMI per month, then mortgage loan is the best answer to it. A Mortgage loan means to pledge your existing residential/commercial property with the lender and draw a loan against the pledged property for the required amount. There are also few lenders who provide loan against the pledged plot too.

An Applicant can either approach Bank or NBFC for his requirement. The difference would only be in the rate of interest. Interest Rates are higher with NBFCs in comparison to Banks. A minimum of 15-20 workings days is required for getting a mortgage loan. An applicant’s loan eligibility is calculated on the basis of his combined income with co-applicant subject to the LTV (Loan to value) i.e. the market value of the property. FOIR (Fixed Obligation Against Income Ratio) is taken @ 40%-60% of the financial income, while the LTV considered is the maximum of 60% of the market value. The lower of the two will be an applicant’s loan eligibility.

Important highlights in a mortgage loan:

a) Property to mortgage has to be a self-owned or jointly owned or can also be parental owned residential or commercial property. A pagadi and an ownership chawl property are not considered for a mortgage loan.

b) Property agreement has to be a registered agreement and stamp duty duly paid. The notarized agreement is not considered for a mortgage loan.

c) In the event where property ownership is transferred through a gift deed- the mortgage is possible only when the said stamp duty and the registration charges are duly paid on the gift deed.

d) SRA property which is less than 10 years old cannot be a mortgage for a loan.

The mortgage loan is advantages when you have a moderate urgency for money and can bear a considerable period of processing time for a minimum of 20 days or more. It is favorable because of its features:

a) Longer tenure- mortgage loan can be availed for a longer tenure of up-to 15yrs. Some lenders also provide loan for 20yrs too.

b) Lower EMI – the beneficial feature of longer tenure helps to reduce per lakh EMI which in turn reduces per month EMI for you.

c) Low ROI – the mortgage loan comes with the attractive interest rates which are much lower in comparison to personal loan/business loan.

Similar to top-up loan mortgage loan also do not qualify for tax benefits. Therefore with reference to our illustration, Mr. Ashwin can also make a wise decision of mortgage loan on his commercial property by pledging his property with the Bank/NBFC for 10 lakhs, in case the LTV factor on Home Loan top-up doesn’t fulfill the desirable loan amount.

3) Seek Personal Loan. A personal loan is yet another way to secure your quick requirement of funds. It is an unsecured loan which is easy to avail against the simple documentation of income source. Unlike secured loans like that of mortgage there is no requirement to provide a security in a form of pledge to get this loan. The tenure in such type of loans is usually kept short say for a period of 5-7 years maximum. Though it is advantageous in terms of minimal documentation (KYC + financial documents) and the processing time which is only 3-5 working days, but the cost involved to get the same is nearly high to 1-3% of the processing fees along-with 2-5% of foreclosure charges. It also comes with the lock-in period with respect to part payment and pre-payment of the loan. But such quick loans often come with comparatively high rate of interest. The term personal loan is often associated with salaried people where the rate of interest differs from person to person depending on the company he is working with. The listed companies are categorized and labelled as Category A, B, C and so on. The employees of A Category Company enjoys relatively low rate as compared to others and vice –a-versa.

With the change in the technology a personal loan is now made instantly accessible to the salaried class in the form of pre-approved loans with the help of the lender Bank/NBFC ‘s APP. The APP helps with instant approval as well as disbursement of the loan within seconds in your account.

Personal loan is suitable only for those who are looking for small amount of loan but for those having higher requirement for funds, going for personal loan may not be the optimal choice because of the low tenure & higher interest rate, the EMI’s are tend to be high which further increases the financial burden.

4) Go for Business Loan. There is a limit on how much one can expand his business by using his own funds & therefore the concept of business loan was born. It can be only availed by people who are self employed and self employed professionals (Doctors, CAs, Architects, etc). A self-employed with any type of company whether partnership, private limited, public limited or even the proprietorship company can apply for business loan. There is no such term as personal loan for self employed people. It is rather classified that a personal loan is for fixed income earners i.e. the salaried class while for the entrepreneurs the answer is business loan. A business loan can either be drawn in individual’s personal name or it can also be taken in the name of the company. But unlike personal loan, stability in the business is the key factor for getting business loan. A minimum of 5 years continuity in the same business is expected along with the regular income tax filling. 3 years of mandatory ITR is what is required if planning for a business loan. Good CIBIL, good banking, profit making, business proofs, etc are yet other factors which are equally important in business loans.

However the processing cost and the rate of interest is much higher with business loan. A processing cost of 2% -3% is what is considered as standard in business loan however which may also go up-to 5% depending on case-to-case. While the rate of interest starts with a minimum of 13%, it depends on various factors such as nature of business, loan amount applied for, CIBIL score-repayment track record along with the past relationship with the bank/NBFC, etc. Foreclosure charges are also high in this type of loan which may range up-to 5% of the loan amount.

Business loan can also be secured and unsecured. A secured business loan is the loan taken for business by providing assets, fixed deposits, gold, shares, bonds, etc as collateral for taking the loan. The loan which are not secured i.e. which does not involve collateral is termed as unsecured business loans.

Apart from the broad category of secured and unsecured, business loan itself is of various types such as, equipment loan, term loan, bank line of credit, business credit card, etc. It also covers the start-ups loans required for starting a business.  Various government initiatives such as Mudra Loan, MSME(Ministry of Micrp, Small & Medium Enterprises), etc are a part of start-up loans.

NOTE: It is important to note that a negative profile and negative business nature along with low cibil score, do not qualify for a business loan.

In our case of Mr. Ashwin, it isn’t a wise decision to opt for an additional fresh business loan of 10Lakhs in order to fulfil his immediate requirement rather it can be thought as a standby option that can be looked as an alternate solution if he is fails to raise the required funds through earlier suggested options, reason being- the loan tenure provided in business loan is only a maximum of 5 years (7 years in exceptional cases) which with the combination of high rate of interest substantially increases the EMI per month.

5) Get Overdraft Facility (O/D) – Overdraft in simple terms means withdrawing from the bank’s a/c even if the account balance falls to zero. Therefore the overdraft facility is the line of credit (agreement between bank and the a/c holder) which is typically given based on the account holder’s balances -such type of o/d is termed as unsecured o/d OR the o/d is available in the form of pre-sanctioned loans against the assets such as bank FDs, shares, bonds, insurance policies, properties or even the funds lying in your account- which is why it is termed as secured o/d. The sanctioned o/d limit and the interest charged in this facility may vary depending on nature of assets offered as collateral.

The advantage of o/d facility is its interest component & easy repayment policy. The interest is charged only on the used amount which is withdrawn and only for the time it is withdrawn. The interest is calculated on daily basis and is billed to the account at the end of the month. The repayment of the o/d is very simple; the borrowed amount can be repaid cumulatively. There is no such term as EMI associated with the o/d, unlike in other types of loans such as a mortgage, personal or business loan, etc where one pays to banks in the form of equated monthly installments. Rather just by simply depositing the funds in the bank a/c will decrease the outstanding balance and in turn reduces your loan amount, that is how the o/d is repaid.

O/d doesn’t have any locking periods. An o/d amount can either be repaid partially or fully & at any number of times without prior intimation to the banks. Unlike with other funding loans such as personal, business or mortgage loans, there are no pre-payment charges associated with o/d facility.

Initially, this facility was established only for the business purpose and for those doing business in order to meet their short term cash flow requirements, but sine recent past the facility is also extended to the salaried accounts as well.

Even though such type of facility is easily accessible and comes with relatively cheaper rates in comparison to other loans, it is observed that the amount allowed to be withdrawn through an o/d is usually lower for a person eligible for higher personal or business loan: the reason being-it is the sole decision of the bank to provide the overdraft limit to the a/c holder on the basis of factors such as his earnings, credit score, age, time frame since how long he is associated with the bank, etc. In other words, it is not the income of the a/c holder that is considered for the o/d eligibility rather it is the account he holds and his transaction pattern which is the base for calculating his o/d limit.

Therefore we suggest Mr. Ashwin to approach his bank B and get a capacity evaluation on the o/d limit he can avail to match with his requirement of Rs lakhs.

Conclusion: To avail any kind of loan it is equally important to have a good CIBIL i.e. a well-maintained credit score. An average score of 750 and above is considered a good score in the finance industry. The only mantra to maintain a good score is to maintain the proper repayment track record of your loan EMI’s.

 Read more About Mortgage loan 

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Ushali mishra

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Ushali mishra
Joined: August 30th, 2019
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