Festive spending is all around us, and many of us need extra cash to splurge. Fortunately, the recent reduction in GST rates has made this a little easier.
So, what are the best ways to borrow short-term funds? Should you seek a personal loan from a non-banking financial company (NBFC) since banks often have longer processes? Or simply swipe your credit card? Perhaps you could visit a bank or gold-loan company in your neighbourhood and pawn your gold jewellery. Other options include redeeming your mutual fund units or borrowing against them, as well as taking a loan against your stocks or even a fixed deposit.
Since personal loans and credit cards are unsecured debts, they come with a higher cost. A personal loan from a bank can carry an interest rate of 10-16%, while from an NBFC it can range from 12% to 36%. Credit card purchases can be even more expensive, with monthly interest charges of 3.75-3.95%, which annualizes to a staggering 45-47.5%. However, using a credit card is undoubtedly the easiest and fastest way to pay for a purchase.
This leads us to the other four options: pledging your assets, be it gold, mutual funds, equities, or fixed deposits. If you own these assets and are comfortable using them as collateral, these secured loans are the most cost-effective choice for short-term debt. They also typically offer a higher borrowing capacity. Before you decide to pledge any assets, however, ensure you have a secure and timely cash flow to service the debt.
Loans against these asset classes are generally priced between 8% and 15% per annum. For example, the average pricing for a gold loan is about 0.8% per month for three months, while a 12-month loan can cost 12-15% per annum. If you own land, you may be able to borrow from nationalized banks at rates as low as 4% per annum, subject to certain caps.
Similarly, you can pledge your mutual fund units to raise cash at 8-15% interest. For equities, this is known as margin funding. You simply log in to your demat account, pledge the shares you own (not those already bought on margin), and the money will typically be in your linked bank account by the end of the day. If you have a fixed deposit, you can also take a loan against it or request an overdraft facility.
So, if you are short on cash this festive season, a loan can be an option to meet your needs. However, the first rule remains: avoid overspending. If you have clear visibility of your cash flow for the next few months and have decided to borrow, always opt for the cheapest loan available. For festival-related expenses, these secured loan options are highly advisable.
Recent RBI data points to this shift in borrowing patterns. Gold loan outstanding surged to Rs 2.94 lakh crore in July, a massive 122% year-on-year jump. In comparison, credit-card spends rose just 6% to Rs 2.91 lakh crore, and personal loans grew 8% to Rs 15.36 trillion. While there are no industry-wide data for loans against mutual funds or equities, margin trading funding (MTF) outstanding crossed Rs 1.05 lakh crore last month. It's important to note that most MTF is for margin trading and not strictly loans against shares held in a pledged account.
That said, pledging your stocks and mutual funds carries risks. Your Asset Management Company (AMC) or brokerage can issue mark-to-market margin calls, typically requiring you to top up 40-70% of the asset's value if the NAV of your mutual fund or the value of your shares declines. If you fail to meet this margin call, they can redeem your units (potentially attracting exit loads and capital gains tax) or sell your shares.