In an interview to CNBC-TV18, Feroze Azeez, Director - Products, Anand Rathi Private Wealth Management highlighted few point to remember before taking loan against personal credibility.
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Below is the verbatim transcript of Azeez's interview with CNBC-TV18.
Q: For someone who maybe battling some temporary cash crunch or who wants to take a loan for some reason is it better to liquidate long-term investments or is the possibility of a personal loan more viable in terms of pure math what should one do?
A: When one is trying to contemplate between dipping into his investments or probably taking a loan against his personal credibility, there are some things which need to be kept in mind. Therefore, I will highlight about three-four of them which are very important.
First and the most important criteria is to figure out whether one need to take a loan or dip into investments and the fact that the ratio between how much is the period of investment and how much time do he need the money for.
Let us assume that one has an fixed deposit (FD) for five years and one needs the liquidity or money for about six months then one knows that one needs it for six months but one would not disturb a five year FD. As long as the time frame of requirement of the money is 25 percent or less one should avail a loan.
Second, if one has a possibility of taking an overdraft then never take a loan because loan will come at a price, for example 15 percent or 14 percent and even if one has an overdraft at 14 percent if one manages ones cash flow properly then he will be able to bring down his effective cost of borrowing to almost about 10-11 percent. Therefore, always choose an overdraft as against the loan because effective cost of borrowing comes down dramatically.
When one is trying to borrow, always try and chose to borrow secured and not unsecured. If one has assets, pledged those assets and borrow because the cost of borrowing comes down dramatically. Never venture into a personal loan if one has a fixed deposit (FD) to borrow against and if one has mutual fund unit to borrow against. So, always take a secured loan. The cost of secured loan is at least 300 basis points lesser, that is 3 percent lesser than what an unsecured loan be.
Whenever one is borrowing against an instrument then he should make sure that he is borrowing against an instrument which is a high yielding instrument, borrowing against FD might not make too much sense because 9 percent is the rate of FD and he is borrowing at 13-14 percent. So, these are the three-four things that one needs to keep in mind.
Always be conscious of not disturbing your investments for the fact that reinitiating them is a big task and a challenge and so don't do that. Even if one borrows for one fourth the period the dilution on his return, if he is doing in systematic investment plan (SIP) is about half a percent which is not as significant and keeps his probability of meeting the goals as high as they are. These are few points which need to be kept in mind before you take a decision on this.
