Nifty99000 100%

Sensex99000 100%

Exclusive

Why Loans Against Securities Can Be A Good & Viable Financing Option

Author: Adhil Shetty/Wednesday, June 26, 2019/Categories: Exclusive

Rate this article:
5.0
Why Loans Against Securities Can Be A Good & Viable Financing Option

Financial emergencies come unannounced. Such unexpected expenses can throw your financial situation out of gear, and you may look for ways to arrange funds quickly. While you can rely on an unsecured personal loan to come out of a financial emergency, you can also explore other cheaper, secured loan options; like a loan against fixed deposits, shares, life insurance policy and mutual funds.

Termed loan against securities, such loans are offered as overdraft facility after you pledge your securities as collaterals. They provide you with the twin benefit of availing funds through your assets while remaining invested in them.

So, how are loans against securities different from personal loans?

Personal loans are unsecured, meaning you don’t have to pledge any security against them. Unsecured borrowing, therefore, charges a higher rate of interest compared to secured borrowing. Additionally, you are required to pay interest only on the loan amount that you have used for a given period.

Now, let’s take a look at various aspects of loans against securities in detail, which might help you in deciding which option to go for when you have a requirement.

How loans against securities are offered

It must be noted here that there are only specified securities which can be pledged to secure a loan by the lender. Once a bank agrees to give you a loan against your pledged security, it will create a lien. The lien works as a security for the lenders in case the borrower defaults on the loan. Once the lien is applied on a loan, you cannot sell or cancel the pledged security.

Also, your loan amount would depend on the value of the security you will pledge as collateral. For the overdraft facility, the bank will open a current account to transfer the money. You can withdraw from this account whenever you need funds and repay the amount in the same account.

So, should you go for loan against securities?

A loan against security provides certain conveniences that you could consider. Based on the security you are pledging, you can fetch a high-value loan at a comparatively lower interest rate. This way, you don’t have to liquidate your asset; rather you remain invested and continue earning returns. The approval time for such loans are usually quick, and so, can come handy during an emergency. However, when you go for a loan by pledging your securities, it is important to understand the salient features of each type of security before making a decision. Below are some crucial pointers about each one of them.

Loan Against Shares: You can avail a loan against listed securities, and this includes stock exchange-traded securities such as government securities, corporate securities and debentures. There will be some amount of volatility attached to such types of loans as stock markets are volatile. So, if the value of shares you have pledged falls, the bank may ask you to pledge more shares as security or meet the value of the shares by paying money. Ideally, you should opt for this type of loan for a shorter duration to avoid volatility risks.

Loan Against Mutual Funds: In case you have invested in mutual funds, taking a loan against them comes as a convenient alternative. A loan against mutual fund works like an overdraft facility, and you are not required to either redeem your units or discontinue your Systematic Investment Plan (SIP) to borrow. Banks attach a lien to mutual funds when you borrow through this method, securing themselves the right to sell or hold the fund. You can bag a big-ticket loan and will be charged an interest rate of up to 11% on the loan repayment. Since the volatility factor is lower for most MFs in comparison to direct equity, this is a more viable option for short to medium-term needs.

Loan Against Fixed Deposits:Like other securities, loan against a fixed deposit is also hassle-free and convenient to obtain. The interest rate is dependent on the underlying FD rate, and is usually 1-2% above the interest rate you will get on your deposits. However, the interest is levied only on the amount used as loan and not the entire fixed deposit amount.

Loan Against Insurance: There are certain eligible insurance policies like ULIPs and endowment or life insurance policies which can help you get a loan by assigning them in the favour of the insurance company or the bank. However, you will be allowed a loan against your insurance policy only if premiums have been paid for 3 years before the loan application. Such a financing option might come to your rescue when you require a low-cost loan. However, it is very important to note that if the interest on the loan is more than the surrender value of the loan, you may no longer get the insurance cover from the assigned policy. (The author is CEO, Bankbazaar.com)

Print

Number of views (436)/Comments (0)

Leave a comment

Name:
Email:
Comment:
Add comment

Name:
Email:
Subject:
Message:
x

Videos

Ask the Finapolis.

I'm not a robot
 
Dharmendra Satpathy
Col. Sanjeev Govila (retd)
Hum Fauji Investments
 
The Finapolis' expert answers your queries on investments, taxation and personal finance. Want advice? Submit your Question above

Categories

Disclaimer

The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.

Subscribe For Free

Get the e-paper free