At times a person is faced with a situation where he or she is in need of finance for a short time, be it fees for the children or unexpected medical emergency or a forgotten electricity bill. It may happen that your regular salary or revenue is still a few weeks or months away and you are in a sudden need to make an urgent payment. In such cases, overdraft against your LIC policy can come handy and save you from the embarrassment of asking for money from others at a very nominal cost.
One has to understand the difference between a loan and an overdraft. The basic characteristics of a loan are as under :
A loan is borrowing for a fixed period where you need to repay the amount of interest or principal or interest and principal together at a fixed interval every month, quarter or year.
With every instalment, the amount of borrowing you have taken is getting reduced and you have it back.
You are obliged to make payment at the decided interval or you are charged with the penal interest.
In case of an overdraft, it is a borrowing limit fixed by the lender which you can enjoy during a fixed period, by availing and repaying.
You are not obliged to repay the amount at a fixed regular interval.
When you avail a certain amount within the limit prescribed for you, you can avail the same after repaying.
If you are having LIC policies, almost all banks will be happy to offer you the overdraft or loan, as per your wish, against the same. The interest rates on this product vary from bank to bank but still it remains competitive. In order to enjoy at present, the money locked in your LIC policy or a benefit you will get in future, a little cost is worth it.
You will need to assign the policy in the lending bank’s favour. LIC will issue a surrender value certificate and normally the lending limit will be fixed at around 85% of the surrender value. You are given a chequebook and you can use a full or partial amount from the limit sanctioned. You will be charged the interest only on the availed amount and for the period for which you have used the facility.
For example, the surrender value of your one or more LIC policies is Rs.100,000. The bank will normally fix the overdraft limit at Rs. 85000 ( 85%). You need Rs.15000 urgently and avail the same on 23rd May. Your salary is on 30th May and you repay Rs.6500. On 26 June, you receive some money and repay the remaining Rs.8500. bank will charge interest for the period from 23rd May to 30th May on Rs. 15000, From 30th May to 26 June on Rs. 8500.
As you have taken Rs. 15000 on 23rd May, you can avail up to Rs. 70000 from that day as you have already used Rs.15000 from the total limit of Rs. 85000. From 30th May, your available limit will be increased to rs.76500 as you repay Rs. 6500.
It is a useful financial tool to look for. However, one must be mature enough to not abuse it. One must have anticipated income when he or she avails of the overdraft limit because if you are unable to make payment at the end of the term of your policy, it will be forfeited. Normally banks charge yearly maintenance charges to the tune of Rs.1000 for these accounts. Also, you are required to pay the one-time stamping charges ranging from Rs. 800 to 1500.