There are various things you do to save your money on small things, for example waiting for brand sales every year to avail big discounts, and travelling in the off-season so that your trip expenses can be reduced. But, when it comes to taking a loan, sometimes you may miss out on some opportunities due to unexplored areas of finance.
Today, let’s understand how taking a loan by pledging an insurance policy could help you as an alternative to a personal loan but at lower interest rates.
What does taking out a loan against an insurance policy mean?
Taking out a loan against an insurance policy means borrowing money from the insurance company using the policy as collateral. If you have a life insurance policy or a whole life insurance policy, you may be able to take out a loan against the cash value of the policy. This is different from a term life insurance policy, which does not accumulate cash value.
When you take out a loan against your insurance policy, you are essentially borrowing money from yourself. The insurance company will lend you a certain amount of money, which will be deducted from the cash value of your policy.
You will be charged interest on the loan, and if you do not repay the loan, the amount borrowed plus the interest will be deducted from the death benefit payable to your beneficiaries.
Benefits of taking a loan against insurance policy
Let’s understand why pledging insurance policy will help you in different ways-
No hard inquiry of credit report: When you take out a loan against an insurance policy, you don't have to go through a credit check, which means if you have low credit or no credit, you may still be able to qualify for a loan.
Lower interest rates: The interest rates on loans against insurance policies are typically lower than those of other types of loans, such as credit cards or personal loans.
Instant disbursal: Because you are borrowing against your own cash value, the process of obtaining a loan against an insurance policy is usually quick and straightforward. You can often receive the funds within a few days.
No repayment schedule: Unlike other loans, you typically do not have a set repayment schedule for a loan against an insurance policy. You can choose to pay back the loan at your own pace, as long as you make the interest payments to keep the policy in force.
No impact on credit score: Taking out a loan against an insurance policy does not show up on your credit report and therefore does not affect your credit score as there is no pre-decided repayment schedule of principal amount.
It is always better to make informed decisions when you save a lot on small things, you have to take care of your financial aspects when you make material decisions as well as taking out a loan. However, the loan amount required is also a crucial factor that needs to be taken into account when taking a loan against an insurance policy in terms of whether it is able to fulfil your needs or not.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com
Disclaimer: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.