With the explosion of nuclear families in India, senior citizens are finding it increasingly difficult to finance their personal expenses. Old age is filled with problems that never seem to end. Elderly people find it difficult to meet their medical expenses within the usually small pool of investments that they have made. It becomes challenging for them to live their life with contentment

Though government employees do get their regular pension when they retire, it is no where near enough to meet their needs upon retirement. For self-employed and other salaried individuals the situation is worse, especially if they do not have any savings.

In India there is barely any financial assistance provided by the government for senior citizens who have retired and do not have any regular source of income. It was in this regard that the Union Budget 2007-08 introduced comprehensive guidelines for the concept of reverse mortgage.

Reverse mortgage is a scheme that provides mortgage loans to senior citizens above 60 years, who might not be eligible for any other type of loan. Senior citizens can mortgage their house property to a lender. The lender in return makes periodic payments to the borrower during his/her lifetime, up to a maximum period of 15 years. The borrowers can continue to stay in their mortgaged houses as long as they live. The borrowers are not obliged to repay the loan; the lender simply attaches the property if the borrower and his/her spouse pass away. Even if the borrower and his/her spouse were to outlive the tenure of the reverse mortgage, they can live in that house until their last days. They would just stop receiving the installments from the lender.

Reverse mortgages have a host of advantages, the main among them being that senior citizens have a viable income now to meet expenses. Since this is a secured mortgage instrument, the borrower does not require a regular source of income to be eligible for the loan.

The borrower can continue to stay in the mortgage house till he/she and spouse pass away or change residence, while receiving the periodic payments from the lender. While the property is hypothecated to the lender, the borrower will remain the owner of the property throughout the tenure of the loan. The reverse mortgage can be disbursed in regular installments or as lump sum.

However, the concept of reverse mortgage has not yet picked up in India, though it is very popular in the West. Since it is a new model there is a bit of confusion among the borrowers as well as lenders.
The tax treatment is not yet very clear as to whether the monthly payments accruing to the senior citizen after mortgaging the home should be treated as an income and hence taxed, or just be treated as a loan. There is also no clarity on whether the lender has to pay a property gains tax on the sale of the property.
Banks are finding it difficult to work out the interest component to be charged on reverse mortgage. Moreover, they insist on insurance cover for this product, but there aren’t any insurance products to back this concept.

The author is a Research Analyst at Apnaloan.com Services (P) Limited.

Consider this scenario where you need to discharge certain payments immediately, but are faced with a liquidity crunch. You think of taking a personal loan which is the most convenient method through which you can easily meet all your expenses easily. Or swipe a credit card.

While swiping a credit card in a situation like this may seem to be the simplest solution, it would be wise to avoid giving in to the temptation. It is undoubtedly the most convenient option, but not necessarily a smart one, considering the rate of interest charged is around 35-44 per cent.

Similarly, it is very important to search out the best options that can avail you money according to your requirements and terms. The rates for personal loans range from 12-25 per cent. Now, what are the options available if you want to cushion the impact of interest outgo?

For one, you could try secured loans.

At a time when personal loans have become a norm, most consumers remain unaware of loans against securities including fixed deposits (FDs), national savings certificate (NSC) and jewelry.

In contrast with personal loans and credit cards, secured credit options such as overdraft against FDs attract an interest of 9-10%. This is the prime reason why more prudence needs to be exercised while choosing the mode of credit.
Apart from rate of interest and repayment period, the key determinants to your decision should be the speed of disbursal and of course, urgency of your need. The minimum tenure for a personal loan is 12 months, which means that this option is effectively ruled out if you require a loan for just a couple of months.

Loan against gold jewelry is another viable option. It can be used to fund your short-term needs and is one of the cheapest borrowing avenues available today. Most banks promise hassle-free documentation and quick approval. You can borrow up to Rs 10 lakh and 80% of your ornaments value, and need not specify the purpose. Repayment period usually ranges from 3 to 12 months; some banks also allow you to choose between repaying the loan at maturity or through the EMI route.

Unsecured loans are a very good option for people who do not want to pledge any asset for the security of the loan. Here you are completely free from the collateral matters. Involvement of property in the loan consumes a lot of time. This is due to the property check required to be observed for the placed collateral. So, unsecured loans save your time and provide funds without any complication.
The repayment period of the loan may vary from 1-5 years. These loans are relatively high on cost due to the higher rate of interest.

In unsecured loans lenders observe the repayment capacity and credit record of the borrower. Borrower owning a good credit history is always preferred by the lenders as they provide an assurance to the lender.

The Flipside

If there were no chinks in the armour of secured loans, personal loans and credit cards wouldn’t have been so popular. The first obvious limitation of secured loans is that they demand collateral.
If you do not have any assets to pledge, or are not comfortable mortgaging your prized collection of jewelry, you have no option but to turn to unsecured loans.

Finally, loan-seekers would do well to remember the golden rule that almost everyone is aware of, but few follow: “Borrow if you think you can repay the money comfortably shortly, and always borrow within your means. Never fall into a debt trap.” Secured loans constitute one method of reducing the interest burden and helping you avoid getting ensnared by the debt net.

The author is Research Executive at Apnaloan.com Services (P) Limited.