5 Cheaper Alternatives To Personal Loans Amid COVID-19

The coronavirus pandemic has caused devastating economic damage apart from the obvious health crisis. Almost every company in India and abroad have been affected by the sudden slump in economic activity that has called for cost-cutting measures like pay cuts or even reduction in staff numbers, in some cases. Smaller businesses with illiquid assets have even shut shop to repay debts.

If you are also among those who have faced some kind of income disruption due to the COVID-19 outbreak, you may first look at digging your savings, your emergency fund and short term investments. Later, you can look at loan options, depending on your future repayment capabilities.

Before you take a loan, it would be wise to access your financial situation. If its a pay cut or a partial income disruption that will pick up once movement restrictions are lifted, you can think of taking a loan.

However, if you have lost your job, had to shut down your business or made a big business loss that leaves you uncertain on when things could get back to normal, it would be better to liquidate an existing asset/investment rather than take a loan.

Either way, here are some cheap loan options to help you meet your financial needs:

1. Loan against FD

Fixed deposit interest rates have been falling rapidly due to cut in RBI's repo rates. If you have some money placed in an FD already, it is best not to withdraw it at the moment and instead take a loan against it. Almost all banks allow the loan against FD facility at a cheaper rate as it is a secured loan (backed by collateral). Some banks also provide OD (overdraft) facility against an FD, which will come handy if you run a business, to meet working capital needs.

2. Gold loans

An estimated 22,000-25,000 tonnes of gold sits idle in Indian households, according to the World Gold Council. You can harvest the potential of jewellery or gold biscuits in your house to seek loans from banks, small finance banks or NBFCs (non-banking finance companies).

The current increase in gold prices is also favourable as it increases the market value of the ornaments or coins being pledged by you. Lenders will also offer you loans at a lower rate as risks associated with holding them will be lower.

3. Advance withdrawal of EPF

EPF (Employees' Provident Fund) is a mandatory part of your salaried income, built overtime to encourage people to save for their retirement years. If you are an employee who is on leave-without-pay or have faced a pay cut, the government has permitted EPF subscribers to withdraw as much as 75 percent of your EPF balance upto a maximum of 3 months' salary (basic + DA) as non refundable advance, as part of its COVID-19 relief. You could withdraw less if you do not need the whole permissible amount.

Note that while withdrawals made before completing 5 years of service is taxable, the non-refundable advance facility amid COVID-19 has been made tax-free.

If you have lost your job, you are eligible to make 100 percent withdrawal of the EPF balance after two months of being unemployed.

4. Partial withdrawal from NPS account

Pension Fund Regulatory and Development (PFRDA) has allowed partial withdrawal from the National Pension Scheme (NPS) to meet COVID-19 related treatment expenses. As per general rules of NPS withdrawal, a partial withdrawal of up to 25 percent of the principal amount is allowed for specific needs like child's education/marriage, critical illness etc. Now, COVID-19 has been added in the category of critical illnesses.

5. Partial withdrawal from PPF or loan against PPF

If your PPF account is at least 2 years old, you can take a loan of 25 percent against your PPF balance at the end of the second year. Interest on this loan is 1 percent but you will have to repay this loan amount with interest within 3 years. Also note that till you repay the loan, the amount borrowed stops earning interest.

However, if your PPF account is over 6 years old, you can make a partial withdrawals from your balance but only one withdrawal per year is allowed.