Tired of being rejected for personal loans due to stringent credit score and income criteria? Well, there's good news for you – Loan Against Securities, is a financial tool that offers a solution to your financial needs. Whether you're an experienced investor looking to leverage your investment portfolio or someone exploring new ways to secure a loan, this deep dive will provide you a comprehensive understanding of a loan against securities, its types, pros, cons, and more.
A loan against Securities is a lending product that allows you to pledge your financial securities as collateral to obtain a loan from a bank or financial institution. These could include shares, bonds, mutual fund units, etc. This type of loan allows you to leverage your investments and meet a range of financial needs, from personal expenses to obtaining business capital and more.
If you are new to investing and want to learn more, read: The Ideal Investment Portfolio for a Salaried Person
All banks and financial institutions maintain a list of shares and bonds that they accept as collateral for loans. Generally, they accept shares and corporate bonds from the top 50-100 companies in the market as suitable collateral options. When you apply for a loan, you pledge a portion of your investment portfolio to the financial institution.
In return, they provide you with a loan for a specified period at an agreed-upon interest rate. Despite the pledge, these securities remain your property, allowing you to continue benefiting from any gains. The pledge is dissolved upon the repayment of the agreed-upon loan amount, with the bank earning interest as with any loan.
A variety of securities serve as collateral for a loan against securities –
Equities: Commonly used, but volatile due to stock market fluctuations.
Mutual Funds: Offer diversification and steady returns but are impacted by market changes.
Fixed-Income Securities: Less risky, with comparatively lower returns.
Exchange-Traded Funds (ETFs): Provide diversification and liquidity but are subject to value fluctuations.
Insurance Policies: Including endowment, money-back, or ULIPs, can also be accepted as collateral.
You just have to provide securities to pledge against the loan amount you need. You can enjoy compounding benefits on your pledged assets as well. Moreover, you can trade in these securities if you face troubles closing the loan.
Usually, you can get anywhere from 50-80% of the current market value of your securities, depending on what you pledge. These include mutual funds, non-convertible debentures, life insurance policies, and other assets.
You just have to provide copies of your pledged investments, ID, and address proof, with signature proof (attested documents). This can be done from the comfort of your home as the entire process is digital and automated. Once the lender evaluates the total value of your pledged securities, they disburse the loan amount.
You can usually get these loans at a lower interest rate since the bank is getting collateral in the form of securities. Moreover, you only pay interest for the actual loan amount you utilise. This is calculated on the daily outstanding amount and deducted at the end of each month during the loan period.
Loans Against Securities come without any end-use restrictions. You can use the funds for various purposes, like medical emergencies, leisure expenses, business expansion, and more, without having to provide any explanation.
Usually, the loan amount is determined according to the value of the shares provided as collateral. Typically, it's around half the portfolio value. Thus, lower-priced stocks could get you only a limited loan amount.
If you've pledged equity shares, you may not be able to sell them until you've repaid the entire loan. This can impact your portfolio value as well as the loan limit provided to you.
Lenders offer loans against securities only if you pledge equity shares present on their approved list. Pledging shares not on this list might result in your loan application being rejected. Therefore, it's crucial to check the lender's list of acceptable securities before finalizing your loan.
Type of Security: Interest rates may vary based on the security provided; e.g., equities usually offer higher rates.
Creditworthiness: Borrowers with good credit scores can secure better rates.
Loan Amount: Larger loans may have lower interest rates.
Loan Tenure: Longer tenures may come with higher rates.
Market Conditions: Economic trends, inflation, and RBI’s rate changes can influence rates.
To apply for a loan against securities you must –
Be an Indian citizen, business organization, or NRI
Have a Demat account with a depository participant
Be 18-65 years of age
Provide proof of stable income
Essential documents for a loan against securities are –
Details of Demat securities
Loans Against Securities are unique financial options with numerous features and benefits. Remember that not all securities can qualify for a loan. In such cases, you can choose an instant personal loan for addressing financial urgencies. Bajaj Markets offers such loans with benefits like quick application approval and disbursal. With a 100% online process, you can get up to ₹50 Lakhs from over 15 leading partners at competitive interest rates only on Bajaj Markets!