When we need funds requirements in an emergency, we head to our friends, relatives, or whosoever can help us meet our financial needs. When no one and nothing helps us, irrespective of the reason, the best option is to take a loan against securities, provided that you are active in the stock market or have invested in debt equity, bonds, insurance policies or FDs. The best thing about this banking instrument is that it requires no hefty documentation and is available easily. But when planning to apply for a loan against securities, several questions may pop up in your mind. Away from all the questions, let us first discuss what it is and how it works.
What is a loan against securities?
A loan against securities is a loan that can be obtained by pledging your financial securities like shares, stocks, mutual funds, insurance policies, and fixed maturity plans. It is similar to a loan against mutual funds and a loan against shares. While taking this loan, you pledge the securities you have invested in as collateral against the loan amount. It is a way to make your investment harder and smarter for you.
How does the loan against securities work?
After you deposit your securities, this loan works as an overdraft facility in your account. It helps you avail timely finance without selling your securities in haste. You can withdraw money from your account by agreeing to pay interest only on the loan amount for the period you use it.
For instance, you are offered a loan against shares worth Rs 1 lakh. You draw Rs 50000 and deposit it in two months. In such a case, you must pay interest on Rs 50000 for only two months. You need a current account in your name. And the interest rate is calculated on the amount withdrawn during the utilisation period. If you pledge your securities, you get steady cash when you need it the most without selling your shares or liquidating assets.
Many banks and NBFCs offer loans against securities on particular stock market investments. Here are six facts you need to know about loans against securities.
Fact 1: The application process
Loans against securities require bare minimum formalities. The application process is more or less similar to applying for other loans. If you choose to take a loan from “Abhi Loans”, the loan disbursal is possible in as early as 4 hours with a paperless and easy four-step process. The first step requires you to login into Abhiloans.com with your Aadhar-enabled mobile number. Upload your KYC documents to start the lending process. Next, it is time to mark a lien on the mutual funds or shares starting at Rs 15,000. Once the verification is complete, your loan will be disbursed into your account within 4 hours. It is as easy as that. However, the process may vary from lender to lender.
Fact 2: The loan amount
The maximum loan amount you can get is another thing you should know when applying for a loan against shares, mutual funds, and financial securities. While most lenders claim to offer high loan amounts, there is a catch. The loan amount that financial institutions, including banks and NBFCs, offer generally ranges from 50% to 80% of the current value of the securities you pledge.
Fact 3: Rate of interest
The interest rates on loans against mutual funds and other financial securities go up to 16%, depending on the type of loan taken. As there is stiff competition between banks and NBFCs, you may compare the interest rates of different institutions and negotiate for the best.
Fact 4: Processing fees & charges
Banks or lending institutions levy certain charges for loans against securities. It may include anything from processing fees to pledging fees. Some companies also charge pre-closure fees if you prematurely close the loan. So, before going further in the process, it is critical to know about the various charges. It will help you make an informed decision.
Fact 5: The pre-closure option
The fifth and arguably one of the most crucial facts to know about is the pre-closure option. Suppose you take a loan against securities for one year and can repay it in six months or earlier. You must carefully read all the terms & and conditions and ask the lender about the pre-closure option. In many cases, banks and NBFCs do not inform the borrower about this option until asked about it and charge a hefty penalty in case they close their loan prematurely.
Fact 6: Choosing between a bank and NBFC
If you feel dicey about choosing between Bank and NBFC to take loans from, the latter has advantages over the former. Since banks have a fixed cap, those who need a higher amount of loan on securities can head to an NBFC. Plus, the application process of NBFCs is faster and more flexible than that of banks. And the rest is up to you.