Borrowing against holdings is leveraging your existing holdings—such as fixed deposits, gold, real estate, or stocks—to borrow money from a bank or financial company using the holdings as collateral. Instead of liquidating your investments or tapping long-term funds, you mortgage them to finance short-term needs. This is especially attractive during the festival season when expenditure can innocently jump and liquidity is crucial.
How much can you borrow against fixed deposits?
Banks typically allow 70–90% of the fixed deposit amount to be borrowed. Let us assume that you have an FD of ₹5 lakh; you may be eligible for a loan of ₹4.5 lakh. Interest on lending at such rates is typically 1–2% higher than the interest on the FD, which is much lower than on credit cards or personal loans. Repayment is also manageable, and the FD continues to earn interest while being pledged.
Borrowing against gold to spend on festivals
Gold loans are heavily prevalent in India, especially during festival seasons. Bankers will usually lend you 75% of the gold's market value as per RBI guidelines. Assume your ornaments made of gold are valued at ₹2 lakh. You can borrow as much as ₹1.5 lakh. The processing is quick too, sometimes even within hours, and repayment can be scheduled through EMIs, bullet payments, or over-draft facilities. Default may, however, invite your gold being auctioned, hence borrow only what you can repay.
Loan against property as a choice
If larger spends such as weddings or purchasing high-value items coincidentally fall during festivals, loan against property can be considered as a choice. Banks normally offer 50–70% of the market value of the house as a secured loan. For example, if your house costs ₹80 lakh, then you can take ₹40–56 lakh depending on your eligibility and the terms of the lender. Since the interest rates are lower than those for personal loans, the process of approval is longer, and repayment occurs over years, so it is best for those who need large amounts.
Utilizing shares or mutual funds as collateral
There are securities loans like shares, bonds, or mutual funds. 50–70% of the market value can be borrowed depending on the type of security. The advantage here is that you do not have to sell off your investments to have money at hand and give them time to appreciate while you attend to your celebratory expenses. Market fluctuations, however, may affect the value of the collateral, and if the value decreases, the bank may ask for additional security.
When is borrowing against assets a good idea?
Taking a loan against assets is worthwhile if you require short-term liquidity at a lower price tag and do not want to upset your long-term corpus. It is less risky and economical compared to high-interest personal loans or credit card consumption. Yet, you should have a clear repayment strategy so that you do not end up losing your assets if you default. Borrowing should be for essential expenses alone and not to indulge in splurging during celebrations.
FAQs
1. Is borrowing against assets cheaper than a personal loan?
Yes, loans against assets such as FDs, gold, or property have lower interest rates than unsecured personal loans and hence are more cost-effective.
2. Do I lose the ownership of my assets when mortgaging them?
No, you retain ownership of your assets. But they remain with the lender as security until the loan is paid off.
3. Is there a penalty for prepaying an asset-backed loan?
A few lenders allow for prepayment of such loans without or with a small fee, but terms vary with banks and assets.
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