- Assess whether your cash flow crisis is temporary or long-term
- As an employee (without loss of employment) you can obtain 75% of the EPF balance as an advance
- In the event of job loss, you can benefit from 100% of the EPF balance after two months of unemployment
- You can take a loan against FD or PPF which can be as cheap as 1%
- Make a partial NPS withdrawal to meet medical expenses
- Gold loan can be availed with lower interest rates and flexible repayment options
- Take a loan against equity investments
- Opt for a personal loan only if you have a temporary problem
The coronavirus lockdown is likely to have far-reaching economic consequences. Very few companies with deep pockets will be able to survive this testing period without reducing their workforce or salaries.
Whether salaried or self-employed or professional or businessperson, most are likely to face minor or major disruptions to their income. If you are trapped in such a situation, your first priority should be to return to the pre-crisis income level as soon as possible.
But it can take a few months to a year while you have to manage your expenses. This could mean tapping into your savings, emergency fund, and short-term investments. If this is not enough, you will have to consult other sources. There are other sources you can tap into to meet fund requirements.
Decide between liquidation and loan
When looking for other sources, the first thing you need to do is assess your financial situation. If you are facing a partial loss of income or a temporary interruption of your income, you may consider taking out a loan to overcome the crisis.
However, if you are facing a problem such as a job loss or a larger business interruption and you do not know when things will return to normal, it would be better if you did not add a liability. extra in terms of EMI. A more appropriate option would be to liquidate certain investments.
“Investors can redeem their existing investments to address financial emergencies if they are not specifically tied to critical financial goals, and redeeming them does not result in heavy losses under current market conditions,” says Naveen Kukreja – CEO and Co-Founder, Paisabazaar.com.
Here are some of the options you can explore while getting your personal finances in order.
Advance on EPF: For an employee, the EPF is a long-term investment with a view to retirement. If you are an employee on unpaid leave or facing a pay cut, you can take an advance on your EPF while continuing to work. Following the confinement linked to the coronavirus, an employee can withdraw 75% of his EPF balance up to a maximum of 3 months of salary (Basic + DA) in the form of a non-refundable advance.
Previously, any withdrawal made before the end of 5 years of service was taxable income for the employee. However, now the government has made this non-refundable advance due to the coronavirus lockdown completely tax free.
In the event that you have lost your job, you would be eligible to obtain a 100% EPF balance after two months of unemployment. You can make this claim online if you have updated your UAN with Aadhaar, PAN, bank account and linked it to your mobile.
Partial withdrawal from the National Pension System (NPS): There are many partial withdrawal options available under the NPS. Critical illness is one such option and PFRDA has now included Covid 19 in the critical illness for which subscribers can make partial withdrawals. You can withdraw a maximum of 25% of your total contributions. However, to exercise this option, your NPS account must be at least 3 years old.
Partial withdrawal or loan against PPF: If your PPF account has completed between 2 and 6 years, you can take out a loan of 25% on your PPF balance at the end of the second year before the request. This loan comes with an interest rate of 1%, which is one of the cheapest loans. You must repay this money with interest within 3 years. Until you repay the money, your borrowed money stops earning interest.
However if your PPF account is more than 6 years old, you can make a partial withdrawal from your PPF account. Only one partial withdrawal is allowed per year.
Loan against FD: The interest rate on time deposits has steadily fallen and has settled at around 6% at most major banks. If you hold an old FD for a long term at a higher interest rate, liquidating that FD might not be a good idea. You can take out a loan against it. Most banks offer loans against FD at an interest rate of 1% to 2%.
Lending on financial securities: If you own securities such as bonds, stocks and mutual funds, you can also take out a loan against these. Most equity investors would have suffered losses by now. The only chance of recouping the loss and realizing a gain is to stay invested for a long time. So, rather than liquidating, it would be better to take out a loan against these securities which will come at a much cheaper rate than an unsecured loan like a personal loan.
Loan against Gold – If you are in possession of physical gold, it can help you obtain a good amount of funding without the need for liquidation. The recent spike in gold prices may allow you to secure a larger loan against this asset. You also get a lower interest rate and flexible repayment options.
“Borrowers can opt for the EMI repayment mode or a custom option allowing them to repay the interest component each month while leaving the principal component to be repaid on the due date. Some lenders also allow the option to repay the interest component at the time of sanctioning the loan Some lenders also allow the bullet repayment option for gold loans under which borrowers must repay both principal and interest at the end of the term”, explains Kukreja of Paisabazaar.com.
Should I take out a personal loan?
In the absence of any source of income, it would be difficult for you to obtain a personal loan. Even if you do, it would be better to avoid a personal loan in such circumstances. An unsecured loan like a personal loan comes with a high interest rate and in the absence of any income margin it can lead to a debt trap. In such a situation, it will be better to go for a major expense reduction exercise and liquidate some assets to manage time until you get the desired income.
However, if your job, profession or business is intact and you are facing a temporary pay cut or loss of income, you may consider a personal loan in the absence of savings or assets on which to rely. support you. A personal loan would only make sense when you are facing a temporary cash crunch and your regular income is not disrupted or more likely to be back on track soon. Even when opting for a personal loan, you should check with your bank or credit card provider for any pre-approved loan offers. Often these come at very low interest rates.
Also read: Coronavirus loan moratorium – how to suspend, continue or get a refund for IMEs
Read also: Impact of the coronavirus: Should you pay your EMI or not?