Need to take an emergency loan? Here are your options
An emergency could be anything - an international vacation, higher education or health-related issues. Emergency is like an alarm. We wake up only when it strikes. But today, there are various types of loans available to tackle emergencies.
Many feel loans are specially-designed instruments and are never a burden. When we know that uncertainties are definitely certain in our lives, why not prepare for them instead of carrying a debt on the shoulders? However, there may be cases where we are caught unaware and look for help.
Let us take a look at the different loan options available in the event of an emergency:
SECURED DEBT
As the name suggests, this type of loan has a security/collateral that needs to be kept with the bank in order to obtain a loan. Loan options in this category can be classified into three categories:
Gold loans: Everyone loves buying gold, a traditional favorite for Indians for ages. Be it for marriage or for investment, gold is always a favourite. An emergency loan can be availed against some of the idle gold. Leading banks offer gold loans for decent interest rates. One can get up to 60 per cent on the value of the yellow metal.
Loan against securities: You may have bought a lot of securities for investment such as insurance, public provident fund, fixed deposits, stocks, etc. These can be pledged with the concerned institution to secure a loan. The amount of the loan would depend on the value of the security. Some of the securities such as PPF would be eligible for loans only after holding for a specified period.
Loan against property: Real estate can also be used to pledge in order to secure a loan. In this option, loans of up to 40-70 per cent of value of property can be obtained. The tenure of such loans is usually 10-15 years, which is slightly higher than other types of loans. When a higher amount is needed, these loans are quite useful.
Secured debt is definitely cheaper. However, in case a default occurs, your pledged security would be put to the risk of loss of ownership.
UNSECURED DEBT
The other type of loan doesn't require you to pledge any security/collateral. This type of debt is known as unsecured debt. The options available here would be:
Personal loans: Personal loans are a very popular form of emergency loan. It is also quite easy, fast and hassle-free to get a personal loan. It can be taken at the click of a button since it doesn't require any security or property to be pledged.
Credit cards: They are the 'ready to use' form of emergency loan. And it's pretty easy to get a credit card these days. Using a credit card is also good to build a good credit score. However, using only a credit card would not make you a good borrower. Once you get a credit card, ensure clearing your dues within time and avoid paying just the minimum amount every month.
Now, let's look at the interest rates involved with all these types of debt:
| Type of loan | Interest rate |
|---|---|
| Gold loan | 12 - 16% |
| Loan against security | 12 - 15% |
| Loan against property | 11 - 14% |
| Personal loan | 14 - 25% |
| Credit card | 25 - 50% |
Conclusion
It is important to know the purpose of taking a loan. Duly comparing aspects like interest rates, processing fees, prepayment penalties, etc. before applying for an emergency loan is a good idea. Many of the loans are negotiable, especially if they are backed by collaterals.
The most important thing is to be able to save for the rainy day. Emergencies are inevitable and should be prepared for.
InvestmentYogi.com is a leading personal finance portal.
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