Being classified as unsecured loans, personal loan is usually more expensive in terms of interest rate compare to any other loan taken against collateral security. In current scenario (April 2014) the prevailing rate for personal loan varies from 14% to as high as 48% pa.

Personal loans are unsecured loans offered by financial institutions without taking any collateral security though some PSU banks may insist on a guarantor. The end purpose of personal loan is not monitored and can be used for any personal need like marriage to holidaying or maybe to buy a lifestyle product or medical emergencies or maybe the down payment for purchase of home.

As the process of applying for personal is quite hassle-free with minimum documentation and disbursement in real quick time, it continues to remains one of the most favourite option to the borrowers.

The personal loan amount and rate of interest is dependent on three major factors i.e. borrowers’ income and his ability to service the loan, credit history of the borrower and the company for which the borrower is working (so be prepare to pay higher interest rate if you are not an employee of their list of preferred employers)

Being classified as unsecured loans, personal loan is usually more expensive in terms of interest rate compare to any other loan taken against collateral security. In current scenario (April 2014) the prevailing rate for personal loan varies from 14% to as high as 48% pa.

So, let’s look at the cheaper options to personal loan in case of short-term financial needs.

Friendly Loan from Family, Friends and Relatives:

Borrowing from family, friends and relatives is the easiest and safest option of borrowing as they may lend you at a better terms and conditions than the financial institutes. Secondly, whenever you have additional funds to prepay you can foreclose the loan without paying any penalty.

Loan against Fixed Deposits:

One can borrow up to 90% of his / her fixed deposit amount in the concerned bank. Interests charged on such loans are generally 1 % - 2% higher than the interest rate you receive on your fixed deposits. Hence, if you are earning 9% p.a. on your fixed deposits, the interest you will have to pay on your loan overdraft will be around 10% - 11% p.a.

Here one must note that you cannot avail loan against tax saving Fixed Deposits.

Loan against Gold Jewelry:

You can pledge your gold jewelry and avail up to 75% of the realizable value of gold jewelry / ornaments though banks can and do provide a higher percentage of the realizable value of the jewelry as well. Gold loan is usually available for tenure of one year and it can be further extended at the prevailing rate of that time. You just need to walk into any branch office of the lender along with the gold jewelry. The lender will evaluate the jewelry and provide the loan based on their valuation rather than the cost mentioned in your purchase bill. Depending on the LTV opted by you, the rate of interest will vary from 11.25% - 25% pa.

The trick to get lower rate of interest is to ensure that your loan amount does not exceed more than 50% - 60% of the jewelry value. Muthoot Finance and Manapurram Finance are two very active players in loan against gold jewelry.

Loan against Property:

Typically you can get up to 50% - 60% of the value of the property or twice your annual income (whichever is lower) as a loan against your immovable property. It is available for a period of 5 years to 15 years and the rate of interest will be in the range of 12.50% – 15.75% p.a. Loan against property is usually a time consuming lengthy process and is not ideal for people who have a relatively smaller cash requirement of couple of lakhs.

Loan against Securities:

This loan is available against pledging of securities like Mutual Funds, Demat shares, Insurance policies (ideally traditional policy like endowment policy) with high surrender value, National Savings Certificate / Kisan Vikas Patra, Bonds, etc. Lending institutes generally have their own list of approved mutual funds and shares and will provide loans against this list only. Since the value of mutual funds and shares fluctuate frequently, the lenders will keep a higher margin while financing against these securities.
The rate of interest on these loans will be around 12.5% - 15% pa.

Loan against Public Provident Fund:

A subscriber can take loan against his public provident fund balance only for specific purposes like education, marriage, medical expenses, etc. subject to restrictive terms and conditions. Subscriber can avail the loan facility from 3rd financial year up to the end of 5th financial year. However one cannot take loan after the end of 6th financial year.

The repayment of loan can be made in lump sum or in 2 or more monthly installments but within 36 months from the date of disbursement of loan. The rate of interest charged on this loan is 2% p.a. higher than the interest you get on your PPF account.

Top-up Loan:

If you are an existing home loan borrower, you can ask your lender to give you a top up loan on the security of the house. You will be eligible for a top up loan only if your repayment track record is good and your income is sufficient to service both the home loan and the top up loan. It is also important that the property value also is sufficiently large to provide an appropriate margin for both the loans put together. The top up loan is likely to be slightly higher than your existing home loan but lower rate than the personal loan and hence it is a good idea.

Loan from Employer
Under certain circumstances your employer might agree to offer you the loan and adjust the amount against your monthly salary.

All the above options are not only cheaper than personal loan but can be availed even if your credit rating is poor. The exception to the rule is Loan against Property and Top-up loan, where your credit history will play a major role in getting your loan sanctioned.