Given that unsecured loans like personal loans and credit cards are not backed by any security or collateral, lenders lay a greater emphasis on credit score while evaluating loan applications. So those having a poor credit score have lower chances of availing unsecured loans or are charged higher interest rate to make up for the increased credit risk for the lender.
Such loan applicants may find it easier to avail secured loan options as they carry lower credit risk for the lender. The availability of adequate collateral would allow the lender to recover outstanding loan by selling the pledged security in case of any default.
Here I will discuss 4 alternative loan options for those with lower credit score, which do not come with any end usage restrictions:
Loan against property
Loan against property (LAP) is sanctioned against the collateral of residential plots, commercial and industrial property. It allows property owners to monetize their assets and raise finances without selling the property. The interest rate of LAP starts from around 8.05 percent per annum while the loan amount can go up to 60 percent of the property’s market value.
The repayment tenure usually goes up to 15 years, with some lenders offering tenure of up to 20 years. The repayment tenure usually goes up to 15 years, with some lenders offering tenure of up to 20 years.
As the availability of longer tenure results in lower EMIs, those with limited EMI affordability can opt for bigger loan amounts through LAP.
Such borrowers can later prepay the loan to reduce their overall interest costs as and when they have surplus liquidity in future.
Gold loan
A large section of Indian households keep a sizable proportion of their wealth in the form of gold jewellery or ornaments. This has led gold loans to become a popular credit choice for those facing financial shortfalls or liquidity constraints.
The interest rate of gold loans usually starts from 8.5 percent p.a. while their repayment tenure can go up to 4 years. The loan amount can go up to 75 percent of the gold pledged with the lender.
One of the biggest advantages of availing gold loans are its quick disbursals.
Lenders usually disburse gold loans within the same day of making loan application, making it one of the quickest among all loan options.
Another major advantage is the repayment flexibility. Apart from the usual EMI mode, lenders allow their borrowers additional repayment options like bullet repayment option or pay interest component upfront and repaying the principal amount after the completion of loan tenure. Such repayment flexibilities can particularly be helpful for those lacking uniform cash flows.
Top-up home loan
Top-up home loans can only be availed by existing home loan borrowers having a good repayment track record. The sanctioned loan amount is over and above the home loan’s outstanding amount.
However, the amount cannot exceed the difference between the original sanctioned home loan amount and the outstanding loan amount.
Similarly, the repayment tenure also cannot surpass the residual tenure of original home loan. With interest rate usually beginning from 6.8 percent per annum onwards, this loan option is the cheapest for existing home loan borrowers, especially for those having existing home loan at lower interest rates.
Loan against securities
Loan against securities (LAS) are offered against bonds, shares, exchange traded funds (ETF), mutual funds, life insurance policies, small savings schemes like National Savings Certificate (NSC) and Kisan Vikas Patra (KVP). LAS borrowers continue to receive interest, dividend or bonuses on the securities on the pledged securities during the loan tenure.
Lenders usually have a list of approved securities, especially in case of mutual funds, ETF, shares, bonds, etc, which can be used as collateral for availing LAS. The loan amount too would depend on the type of security pledged, subject to the regulatory cap on LTV ratios imposed by the RBI. For example, lenders usually lend up to 60percent of equity mutual funds held as collateral as loan while the RBI has capped the LTV ratios of equities at 75percent.
The list of the approved individual securities and their respective LTV ratios also varies across the lenders depending on the risk assessment of the individual securities made by the lender.
The loan facility is usually offered as an overdraft facility wherein a credit limit is sanctioned to the borrower on loan approval. The borrower will incur interest only on the amount drawn till its repayment.
While the borrower is usually required to repay the interest component, he is free to repay the principal component in part or in full during the loan tenure as per his cash flows without incurring any prepayment penalty. He can also keep redrawing from the sanctioned limit and repaying it any number of times during the tenure of the overdraft facility. This makes LAS an excellent tool for those facing short-term fund shortages or those facing frequent cash flow mismatches.
Radhika Binani is Chief Product officer at Paisabazaar.com, with nearly 18 years of extensive experience across financial services, consumer banking and FMCG. At Paisabazaar.com, she spearheads the consumer-focused product innovation platform and is responsible for making a world-class credit score platform that gives consumers access to free credit reports.
