Exploring the Risks and Rewards of Digital Loan against Securities
While a loan against securities comes with rewards, it involves some risks too. And you need to know all about them before applying for a loan, no matter what you pledge as collateral, how much cash you want to borrow, and which lender you choose.
Let us explore the risks and rewards of a digital loan against securities. But you must first know what it is and how it works.
Introduction to digital loans against securities
A digital loan against securities is a facility that allows individuals and companies to borrow against financial securities, such as stocks, bonds, mutual funds, insurance policies, etc. The lending institution providing the loan holds these securities until the loan is paid back. However, the ownership of the pledged asset remains intact, meaning that it continues to give dividends and other benefits to the owner. This type of loan is available for a short tenure and can be used for different purposes by the borrower.
Also, sometimes known as a quick loan online or an instant loan against securities, a digital LAS provides you with 50-75% of the value of pledged securities, depending on their type, at nominal interest rates. Since it is a collateralized loan secured by assets like stocks, mutual funds, and bonds pledged as collateral, borrowers can avail of it without much documentation and formalities.
How does a digital loan against securities work?
Borrowing against securities allows borrowers to pay the interest only on the amount they withdraw and for the period they use it. For instance, a bank/NBFC offers you Rs. 5 lakhs against your debt mutual funds. Let us assume: you withdraw only Rs. 1 lakh and pay it back in one month to set your pledged assets free. In this case, you have to pay the interest only on Rs. 1 lakh for one month. With that being the case, an instant loan against securities is a feasible solution to meet your short-term financial needs. Let us now discuss the rewards and risks associated with this loan facility.
Rewards for the borrower
A digital loan against securities or a quick loan online comes with several rewards that make borrowing easy, transparent, and convenient.
- Lower interest rates
The first on the list is low-interest rates. A loan against securities (LAS) could make cash available at as low as 8% interest rates (IR) per annum. The IR may, however, go up to 15% or more, varying from lender to lender. If you borrow from a lender like Abhi Loan, the IR could start at 0.67%/month or 8% per annum flat.
- Quick disbursal
Another reward borrowers can reap on a digital loan against securities is fast disbursal. As most banks/NBFCs facilitate online applications, borrowing against securities is safe, quick, convenient, and paperless. Digital applications eliminate the need for lengthy paperwork and physically visiting the bank.
- Amount flexibility
The value of your pledged securities determines the loan amount you can access. However, the minimum and maximum credit limits may vary from one lending institution to another. For example, Abhi Loans offers flexible loan amounts, ranging from Rs. 15,000 to Rs. 1,00,00,000 against your mutual funds. Whether you need a high or a low loan amount, a digital loan against securities caters to your immediate fund requirements.
- No prepayment charges
Most lending institutions do not levy extra charges if you choose to pre-close the loan. If you take the loan from such a lender, you can pay at will even before the maturity date without bearing any prepayment charges. This feature makes LAS one of the most feasible borrowing options for individuals requiring short-term capital.
- Volatility of securities
Changes in the value of pledged securities are inevitable as the market fluctuates. If the value decreases significantly, the lender may ask borrowers to submit additional collateral or sell off their pledged securities to recover the loan amount. It can lead to a loss.
- Charges on default
If you fail to repay the loan on time, the lender may liquidate the pledged securities to recover the loan. And if the proceeds from the sale fall short, the lender may levy high-interest rates on the outstanding amount.
- Limited borrowing option
One of the many drawbacks of borrowing against securities is that it is limited to the value of the pledged securities. You will not be able to get a higher loan amount if the value of your securities is insufficient.
To conclude, a digital loan against securities is a convenient way to access funds quickly at lower interest rates without undergoing hefty documentation. It has some cons too, which you should be aware of while taking an instant loan against securities. Evaluating the risks involved will help you make a wise borrowing decision.