Personal Loan Alternatives: Explore Your Options Before Applying

Best Personal Loan Alternatives

1. Credit Cards

   A credit card is a plastic payment card that allows you to borrow money from a financial institution to make purchases or withdraw cash. When you use a credit card, you are essentially taking out a short-term loan from the card issuer. You can make purchases, pay bills, or withdraw cash, and then repay the amount you have borrowed, along with interest and fees, at a later date. The payment cycle of this card is usually 30 days. 
    
   Before applying for a credit card, consider interest rates, fees, rewards, and other terms and conditions. Another attention is to avoid using your card outrageously, as this harms your credit score.
    

   Pros of Credit Cards

   • Convenient payment option: With a credit card, you can make various transactions such as online shopping, bill payments, and ATM withdrawals. You can use it anytime, anywhere, making it a convenient mode of payment.
   • Rewards and discounts: Many credit cards provide rewards and discounts on purchases, making them an appealing option for those who make frequent purchases.
   • Improves your credit score: Using your credit card responsibly, such as making timely payments, can help improve your credit score. This can benefit you in the future when applying for loans or other financial products.
   • Increased spending power: Credit cards have a higher spending limit, allowing you to make larger purchases.
    

   Cons of Credit Cards

   • High-interest rates: Credit cards often have high-interest rates on unpaid balances, leading to significant debt if not managed responsibly.
   • Tendency to overspend: The increased spending power of a credit card can be tempting, leading to overspending and getting into debt.
   • Additional fees: Credit cards can have various fees, such as annual fees, late payment fees, cash advance fees, and balance transfer fees, which can add up and become expensive.
   • Security risks: Using your credit card for online transactions or in public places can increase the risk of fraud or identity theft. It is crucial to take measures to protect your information.
    
   Also Read: Personal Loan or Credit Card Which one would you go for
    

2. Gold Loans

   A gold loan is a type of secured loan where you use your gold jewellery or coins as collateral to borrow money from a lender. The lender will assess the value of your gold based on its weight and purity and then provide you with a loan amount that is a percentage of the assessed value. The loan amount and interest rate will depend on several factors, including the lender's policies and the current market value of gold.
    

   Pros of Gold Loans

   • Tax benefits: Using a gold loan for business purposes or purchasing a residential asset qualifies you for a tax deduction on interest payments under various sections of the Income Tax Act.
   • Security: Physical gold is vulnerable to theft. However, keeping it with lenders to secure funds keeps it safe and secure. It is the responsibility of your lender to compensate for the loss in the unlikely event that your collateralized ornaments are lost or damaged.
   • Non-stringent eligibility: Credit risk is almost eliminated when backed by valuable jewellery or gold bars. If you have a low credit score because of unavoidable circumstances, the lender may still sanction funds.
    

   Cons of Gold Loans

   • Risk of losing your gold: If you are unable to repay the loan for any reason, your lender may seize and auction your collateralised gold to recover the debt.
   • Limited loan amount: The loan amount you can get is based on the value of your gold, which may not be enough to meet your financial needs unless you have a large amount of yellow metal to collateralise.
   • Short repayment period:Gold loans typically have a short repayment period, which makes repayment challenging for those on a limited budget.
   • Higher interest rates than secured loans: While gold loan interest rates are lower than unsecured loans, they are still higher than secured loans, such as loans against property as collateral.
   • Price fluctuations: When the value of gold falls on the commodity exchange, the lender will require you to pay the deficit in the margin requirement.
    

3. Loan Against Insurance

   A loan against insurance allows you to borrow money using your life insurance policy as collateral. When you take out this loan, the lender will assess the value of your life insurance policy and then provide you with a loan amount that is a percentage of the policy's value. The loan amount and interest rate will depend on several factors, including the lender's policies and the terms of your insurance policy. It is worth noting that loans against insurance are only available for policies with some cash value. You cannot use term life insurance as collateral to obtain funds.
    

   Pros of Loan against Insurance

   • Easy access to funds: Loans against insurance policies are easily available and can be procured quickly in case of an emergency.
   • Lower interest rates: Loans against insurance policies usually have lower interest rates compared to other forms of unsecured loans.
   • Flexible repayment options: EMI payment options for loans against insurance policies are usually flexible and can be tailored to suit your financial situation.
    

   Cons of Loan Against Insurance

   • Reduced benefits: By taking a loan against an insurance policy, the policyholder is reducing the death benefits that would be payable in case of death. It means that the concerned person's family may receive less financial support in the future. It may also reduce the policy's surrender value, potentially leaving you with less money when you need it in an emergency.
   • Limited loan amount: The loan amount you can receive is limited to a certain percentage of the insurance policy's surrender value. You may have to look at other loan options if you need more funds.
   • Potential policy surrender: If you are unable to repay the loan, the insurance company may ask you to surrender the policy, effectively ending your coverage.
    

4. Loan Against Property

   A loan Against Property (LAP) is a type of loan that enables you to leverage the equity in your property to access substantial funds. The loan is available against farmhouses, hotels, schools, or other commercial properties. Lenders usually hesitate to lend to salaried-class individuals due to the large amount of EMI. 
    

   Pros of Loan Against Property

   • Higher amount: Depending upon the property condition and its location, as well as your credit profile, you can get funding up to 70% in loan-to-value of your property's current valuation. 
   • Low-interest rate: Due to the involvement of pricey property which reduces the credit risk significantly, the lender approves this loan at a much lower rate. 
   • Simple eligibility: As previously stated, because a mortgage loan against property is secured by a valuable asset, you can be approved even if you are new to credit and have only taken out a small amount of personal loan or consumer durable finance in the past.
    

   Cons of Loan Against Property

   • Lengthy processing time: Getting a loan against property can take several days to process. That is because it requires a lot of documentation and appraisal of your property. A mortgage loan may not be ideal if you need the money quickly.
   • Property risk: Since LAP EMIs are typically on the higher side, having a solid repayment plan is critical. In the event of multiple EMI defaults, you will be classified as a non-performing asset (NPA), and the lender may seize and sell the mortgaged property to cover its losses.
    
   Also Read: Personal Loan vs. Top-Up Loan: Know the difference
    

Conclusion

 Before applying for a personal loan, looking into other options is a good idea. This one is especially true if you have a low credit score or limited credit options. Credit cards or collateralised loans can sometimes provide more flexible repayment terms, lower fees, and better interest rates. However, before deciding, it is critical to understand the pros and cons of each option and carefully consider your financial situation. Finally, the best pick depends on your specific needs and financial goals.