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Sowmya Sundar

MR and Mrs Sharma are a typical middle-class retired couple leading a peaceful life out of a monthly income from investments and pension. One morning, Mrs Sharma falls ill and is admitted to a hospital. Mr Sharma is worried as to how to foot the hospital bill and treatment charges. Mr Sharma has two options: Take a loan against his investments or go for a personal loan. If you think Mr Sharma will not get a personal loan as he has retired, you will be wrong. Many banks now offer personal loans specially targeted at senior citizens drawing pension. In this issue we check out the various loan options available:

Fall back on your investments

If you need money urgently, checkout your piggy bank first before contemplating other options. It is always better to fall back on your investments for an interim cash crunch, as it is risky to go for a personal loan in old age. You can take a loan against your fixed deposits, National Savings Certificates, Kisan Vikas Patras, life insurance polices and RBI relief bonds. The main advantage is the lower interest rate charged on the loan as it is secured. This makes it affordable, and also gives you flexibility in repayment.

A loan against a fixed deposit can be obtained at 2 per cent over and above the rate paid on the deposit. For instance, Sundaram Finance charges 9 per cent for a loan against its two-year deposit; its deposit rate for the same tenure being 7 per cent. Your fixed deposit becomes eligible for a loan after a three-month lock-in period.

You can also pledge your insurance policies to take a loan. Most insurance policies with a savings component offer loan facility. An insurance policy becomes eligible for a loan only after three policy years. If the premiums are paid for three years and the policy is in full force, then it acquires a surrender value, that is, the amount you would get if you surrendered the policy. A loan can be taken up to a maximum 90 per cent of the surrender value at a rate decided by the insurance company. The interest rate charged by LIC for a loan is 10.5 per cent.

Investments in the recently launched Varishta Bima Pension Yojana for senior citizens are also eligible for a loan at the rate of 10.5 per cent per annum after three years. Since the scheme was launched recently, investors would still be subject to this lock-in. As for loans against insurance policies with private players, most have been in the business for hardly three years, and, hence, few policies might qualify for one. But the option can be taken at a later date. The rates will be pegged to the market.

How to tap these loans

If you plan to fall back on these investments for a loan, you can either approach the issuer of the instrument for one or pledge the instruments with a bank. For instance, State Bank of India offers loans against LIC policies, National Savings Certificates, Kisan Vikas Patras and RBI relief bonds at 9 per cent. This is one percentage point higher than the interest earned on these instruments. Bank of Baroda offers a demand loan or an overdraft facility against these instruments at 10.5 per cent.

Personal loans

If you do not have investments to pledge or if you do not want to touch them, don't worry. Quite a few public sector banks now offer loans specifically targeted at senior citizens who receive monthly pension. The loan amount would range from 6 to 10 times the monthly pension drawn, is usually a term loan repayable in 12 to 36 monthly instalments. The interest rates range from 11.5 per cent to 15 per cent depending on the bank. Most banks require you to maintain your pension account with them and the EMI (equated monthly instalments) is deducted directly from the pension credit.

While most offer fixed rates, Canara Bank offers a 12 per cent floating rate. Any upward or downward movement in the interest rates in the economy will result in a corresponding change in your loan interest and the EMI is adjusted accordingly. Being a senior citizen, if you like to know your commitments in advance, it is better to lock in at a fixed rate. Union Bank of India offers an overdraft facility up to 90 per cent of a month's pension to meet short-term commitments. But the penalty is hefty at 2 per cent a month, and the repayment period is limited at one-three months. It is similar to the penalty on a credit card. It is better to avoid such schemes as they might push you into a debt trap.

What is special?

Personal loans offered for the greying population are special and a come with a number of concessions. The interest rate on the personal loan is higher than the other pledged loans as it is not backed by any security. However, the rates offered are much lower than those offered for other personal loans. Other personal loans cost upwards of 14 per cent. Some foreign banks also charge 17-20 per cent.

Other terms and conditions, such as prepayment charges and processing fees, are also absent, making it more affordable. For instance, other personal loans usually charge a pre-payment penalty of 2 per cent of the amount pre-paid and do not allow pre-payment before six months.

These loans can be prepaid any time without any penalty. A processing fee ranging from Rs 100 to 1 per cent of the loan amount is also charged on other personal loans.

Except for Allahabad Bank, which charges a processing fee of Rs 400 or 1 per cent of the loan amount, others waive the charge for a pensioner loan.

However, the amount that can be taken is much lower than the limit in a regular personal loan. The lower eligibility is due to the limited repayment period and the age factor of the loanee.

How to choose?

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