Interest Rates on Loans Against LIC Policies

Loans against Life Insurance Corporation of India (LIC) policies are a popular way to access funds without liquidating investments. This financial product offers a secure and low-interest option for policyholders who need cash for various purposes such as education, medical emergencies, or business needs.

What is a Loan Against LIC Policy?

A loan against an LIC policy is a type of secured loan where the policyholder uses their life insurance policy as collateral. The amount you can borrow depends on the surrender value of your policy, typically ranging between 85% to 90% of the policy’s surrender value. Since LIC policies are secure and have a guaranteed surrender value, banks and financial institutions are more likely to offer competitive interest rates.

Interest Rates on LIC Loans

Interest rates on loans against LIC policies tend to be lower than those on unsecured loans because of the lower risk involved. As of the latest data:

• The interest rate on a loan against an LIC policy typically ranges between 9% and 10% per annum.
• These rates are floating, meaning they may vary with changes in the bank’s base rate or repo rate.
• Some private banks might offer slightly higher or lower rates depending on their lending policies and the relationship they have with the customer.

Factors Influencing Interest Rates

Several factors influence the interest rates on loans against LIC policies:

1. Policy Type: Endowment plans and money-back policies often have a higher surrender value, enabling borrowers to secure better interest rates.
2. Loan Tenure: The tenure of the loan can also impact the interest rate. Shorter-term loans may attract lower interest rates compared to longer-term loans.
3. Loan Amount: Higher loan amounts, closer to the maximum permissible limit, might come with higher interest rates.
4. Market Conditions: Fluctuations in the economy and the financial market, such as changes in the Reserve Bank of India (RBI) policies, can affect interest rates.

Advantages of Taking a Loan Against LIC Policy

1. Lower Interest Rates:
One of the most significant advantages of taking a loan against an LIC policy is the lower interest rate. Compared to personal loans, which can have interest rates ranging from 12% to 20%, a loan against an LIC policy is much more affordable.

2. Continued Policy Benefits:
The loan does not affect the benefits of the policy. In the unfortunate event of the policyholder’s demise, the sum assured, minus the outstanding loan amount, is paid to the beneficiaries.

3. No Credit Score Impact:
Unlike other loans, a loan against an LIC policy does not rely heavily on your credit score, as the policy itself acts as collateral.

4. Flexibility:
There are no restrictions on how the loan amount can be used. This flexibility allows policyholders to address various financial needs.

5. Easy Application Process:
The process of applying for a loan against an LIC policy is straightforward. Since the policy serves as collateral, there’s no need for extensive documentation or credit checks.

Drawbacks to Consider

While loans against LIC policies offer many benefits, there are some drawbacks to consider:

• Limited Loan Amount: The loan amount is limited to the surrender value of the policy, which might not be sufficient for large financial needs.
• Impact on Policy: If the loan is not repaid, it could affect the policy’s maturity benefits. Additionally, the loan amount plus interest could be deducted from the policy’s death benefit.

Comparing Interest Rates

Here is a comparison of interest rates for loans against LIC policies across different banks:

Bank	Interest Rate	Processing Fee
LIC Housing Finance	9% - 9.5%	0.5% of the loan amount
HDFC Bank	10% - 10.5%	1% of the loan amount
SBI Bank	9.5% - 10%	0.75% of the loan amount

It is essential to compare different lenders to get the best interest rate.

Repayment and Foreclosure

Repaying a loan against an LIC policy is also flexible. Most institutions offer options to repay the loan in EMIs or as a lump sum. Additionally, foreclosure is usually allowed without hefty penalties, making it easier for policyholders to pay off their loan when they have sufficient funds.

Conclusion

A loan against an LIC policy is an excellent financial tool for policyholders who need access to funds at a lower interest rate. The secured nature of the loan ensures favorable terms and flexibility, making it a preferable option over other unsecured loans. However, borrowers should be mindful of the impact on their policy benefits and ensure timely repayment to avoid any negative consequences.