Coronavirus lockdown is likely to have far reaching economic consequences. Very few companies with deep pocket will be able to survive this testing period without reducing their workforce or pay-cuts.
Whether it’s a salaried employee or a self-employed person or a professional or a businessman, most are likely to face minor or major income disruption. If you are trapped in such a situation, your first priority must be to get back to pre-crisis income level as soon as possible.
But that may take few months to a year during which you will have to manage your expenses. It could mean digging into your savings, emergency fund and short term investments. If that’s not sufficient, you will need to look at other sources. There are some other sources that you can tap to meet funds requirement.
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 income loss or a temporary income disruption then you may think of taking a loan to tide over the crisis.
However, if you are facing a problem like job loss or bigger business disruption and not sure when things will get back to normal, then it would be better for you not to add one more liability in terms of EMI. A more suitable option would be liquidate some investment.
“Investors can redeem their existing investments for meeting financial emergencies if it is not specifically tied to any crucial financial goals, and redeeming them do not result in heavy losses under the current market conditions,” says Naveen Kukreja – CEO and Co-founder, Paisabazaar.com.
Here are some of the options you can explore while putting your personal finance in order.
Advance against EPF: For a salaried employee EPF is a long term investment for retirement purpose. If you are an employee who is on Leave-Without-Pay or facing a pay-cut then you can take advance against your EPF while continuing with the job. In the wake of coronavirus related lockdown an employee can take 75% of his EPF balance up to maximum 3 months’ salary (Basic + DA) as non refundable advance.
Earlier, any withdrawal which was done before completion of 5 years of service was taxable income for the employee. However, now the government has made this non-refundable advance due to coronavirus-related lockdown completely tax free.
In case you have lost your job then you would be eligible to get 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 with your mobile.
Partial withdrawal from National Pension System (NPS): There are many partial withdrawal option given under NPS. Critical illness is one such option and now PFRDA has included Covid 19 under critical illness for which the subscribers can make partial withdrawals. You can withdraw a maximum of 25% of your total contributions. However, to exercise this option your NPS account should be at least 3 years old.
Partial withdrawal or loan against PPF: If your PPF account has completed between 2 years and 6 years then you can take a loan of 25% against your PPF balance at the end of second year before the application. This loan comes at an interest rate of 1% which is one of the cheapest loans. You have to repay this money with interest within 3 years. Till the time you repay the money your borrowed money stops earning any interest.
However, if your PPF account is more than 6 years old, you can make partial withdrawal from your PPF account. Only one partial withdrawal is allowed in a year.
Loan against FD: Interest rate on fixed deposit has been continuously declining and it has come at around 6% in most of the big banks. If you are holding a long-term old FD at higher interest rate then liquidating that FD may not be a good idea. You can take a loan against it. Most of the banks offer loan against FD at 1% to 2% interest rate.
Loan against financial securities: If you holding securities like bonds, share and mutual funds then you can also take loan against these. Most of equity investors would already have faced loss. The only chance to recover loss and make some gain is to remain invested for long period. So rather than liquidating it would be better to take loan against these securities which will come at much cheaper rate than an unsecured loan like personal loan.
Loan against Gold: If you are in possession of physical gold then it can help you in securing good amount of funding without any need for liquidation. The way gold prices have surged recently may enable to you get a bigger loan against this asset. You also get lower interest rate and flexible repayment options.
“Borrowers can opt for the EMI repayment mode or customised option allowing them to service the interest component every month while leaving the principal component to be repaid on the maturity date. Some lenders also allow the option to repay interest component at the time of loan sanction itself, and the principal component at the end of the tenure. Some lenders also allow bullet repayment option in gold loans under which the borrowers have to repay both the principal and interest components at the end of the tenure” says Kukreja of Paisabazaar.com.
Should you take a personal loan?
In 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 under such circumstances. An unsecured loan like personal loan comes at a high interest rate and in absence of any income scope it may lead into a debt trap. In such a situation it will be better to go for significant expense reduction exercise and liquidate some assets to manage the time till you get the desired income.
However, if your job, profession or business is intact and you are facing temporary pay cut or income loss then you may consider a personal loan in absence of any savings or assets to fall back upon.
A personal loan would make sense only when you are facing temporary cash crunch and your regular income is not disrupted or most likely to get back on track soon. Even when going for a personal loan you should check with your bank or credit card provider for any pre-approved loan offer. Often these come at very low interest rate.