Liquidity is an important aspect of any investment strategy. You may have lot of investments in a basket of assets, but how liquid is the asset allocation in an emergency is a very important aspect. This is basically a judgmental call because every individual has his/her own priorities. As a thumb rule more liquid an investment is, lesser will be the return on investment. When talking about liquidity, the litmus test is how quickly you can turn the asset into cash. Cash, of course, is the most liquid asset, but if left idle it earns practically nothing. Even investments in highly liquid equities need at least T+2 days for converting into cash. Another aspect to be considered is opportunity loss that an unplanned liquidation of an asset can bring. To give an example, you have invested in a highly liquid asset like a Bank FD when interest rates were high, and in an emergency it is closed before maturity. Later on, when you want to make a fresh FD, it may be at a much lower interest rate! Of course, it can also be at a much higher interest rate. But, the point here is, you are running an investment risk in respect of returns. Similarly, if you sell your equity investment when markets are depressed, your investment will fetch you a much lower return and you may rue your decision to sell.
In an emergency requirement of funds for, say, a few lakhs, for relatively short term, instead of liquidating an asset or taking a loan against an asset, you can look at instant loans offered by banks. These are in the nature of personal loans with a tenure of maximum 2-3 years at interest rates which are competitive for an unsecured loan. The loans are given with minimum paperwork and without any restrictions on use of funds. The USP of the product is how quickly the borrower is in a position to get the funds and with minimum or no lengthy paper work. Necessarily, the loans are restricted to individuals with excellent credit history and CIBIL scores, and for an upper ceiling on maximum quantum. Since there is a penalty for prepayment, when taking the loan itself you can plan and opt for a tenure you are comfortable with.
Credit Card Loan
The most popular instant loan of course are the credit card loans where you can make cash withdrawals or credit purchases and repay through revolving credit facility. The disadvantage is that credit card loans are exorbitantly priced and the credit limit and cash limits are normally limited and may not meet larger requirements. Another aspect is that the card limits get blocked up to the extent of utilization and takes considerable time to be available again as the credit facilities will be available only to the extent of repayments made vis-a-vis the credit limit.
Banks also offer personal loans with no collateral. One well known private sector bank offers personal loans with following USP.
- Loan up to Rs. 15 Lakhs
- No security/guarantor required
- Faster processing
- Minimum documentation
- Attractive rates of interest
- Flexible repayment option of 12-60 months
But this does not actually fall in the category of an instant loan, because you need to make an application with supporting documents (it may be an online application) and processing time can be longer if you do not have an existing account relationship.
There is another category of loan available called as a pre-approved loan. Here, it is usually the phone banking sales executive who gives you the happy news that Bank has selected you for a pre-approved loan of X amount and you can avail it within minimum time and paperwork. How can banks give pre-approved loans? If you are in an account relationship, important personal information on you like average balances you maintain in the account, whether there is any occasion when you have defaulted on any loan repayments, whether there are any occasions when any cheques issued by you have been returned for want of funds, if you are a salaried then what is your net pay, your CIBIL score etc. are available to the Bank. Based on this information it is not difficult to tentatively arrive at credit exposure limit. Moreover, by giving any type of pre-approved credit limit, bank is not obliged to give a loan. It is always T&C apply! There is no commitment or obligation on the part of the Bank. Banks with whom you do not maintain any account relationship also offer pre-approved loans subject to T&C through phone banking. Even though it may appear that your loan is already permitted, in actuality you have to go through the regular formalities and due diligence as in the case of a regular loan application.
Loan on Phone
There is another product called variously by different banks where it is really an instant loan with no documentation at all. One MNC bank offers a product called loan on phone to its credit card holders over and above their credit limit. Your eligible amount of loan, tenure, EMI, service charge etc. can be ascertained through internet banking and on clicking your acceptance a phone banking executive will contact you. You approach the phone banking executive for the loan and the conversation will be recorded through voice recorder. You can decide the tenor and EMI will be fixed accordingly. The loan will be disbursed through a demand draft in your favor within 3 working days if you have no operative account but only a credit card account. No documentation whatsoever is required.
The advantage of this truly instant loan is that:
- It is indeed an instant guaranteed loan.
- Proceeds are made available within 3 working days by the draft / cashier’s cheque being delivered through courier at your doorstep if you have no transaction account.
- You know the maximum amount of loan at the time of asking for the loan and it can be termed as a pre-approved loan.
- Basing on your convenience the repayment option can be exercised from 6 months to 60 months.
- Repayment will be through monthly credit card billing for the EMI.
- Your regular card limits do not get blocked.
- In exceptional cases, bank may allow a higher quantum of loan over credit limit.
An example of ‘Loan on Phone’
Let us assume X has asked for a loan of ₹1,00,000 repayable in 48 months. Let us also assume that the ROI is 14%. The EMI works out to ₹2,733 for 48 months.The actual interest outgo would be ₹31,184. Considering that the loan can be availed by just making a phone call, it is a worthwhile proposition for people with very urgent requirement of funds with no collateral.