Loan against assets – financial assets that can be used as collateral for loans
The wise invest their hard-earned money in assets, such as properties, gold, the stock market, fixed maturity plans, insurance policies, and other financial instruments. The prime reason behind all this investment is a secure future. Not only do these assets give your returns in the long run, but they may also come to your rescue when you come across immediate fund requirements. That is when an instant loan against assets comes into play. Yes, you heard that right! You can use your financial assets, such as equity shares and Mutual Fund units, as collateral for loans.
Lending comes with a certain degree of risk, especially for the lender. To minimize the risk proportion, lenders either gauge the borrower’s creditworthiness or secure the loan through assets as collateral. The loan secured by assets is called an instant loan against assets or a digital loan against securities.
What is a loan against assets?
An instant loan against assets is a secured loan facility. It has gained prominence in recent times since it gives investors a way to get instant cash flow in times of financial downfalls. In such a facility, the borrower must submit his financial assets, including equity shares and MF units, against the capital s/he wants to raise. As a secured loan, loan against assets interest rates is relatively low.
The asset acts as collateral if the borrower fails to meet the loan obligations. In this case, the lender secures the rights to liquidate the assets you have pledged. The amount raised by selling off your investments compensates for the loss incurred by the lender. All this is signed and agreed upon between the lender and the borrower beforehand. After clearing the due loan amount, the balance, if any, is returned to the borrower.
But when planning to use your financial assets as collateral, you must keep the following things in mind, as it will help you make a better borrowing decision.
Understanding the Loan to Value (LTV) ratio
Every lending institution offers a different credit limit against the collateral. In a loan against shares, mutual funds, and other financial securities, the loan amount depends on the current market value of the financial asset you pledge.
After you submit the loan application, the lender sanctions the loan amount based on the LTV calculated. For a loan against mutual funds, the LTV ratio could be up to 75%. And if you use equity shares for a loan against shares, the LTV could range between 30% and 50%. Most/NBFCs use a standard formula to calculate the loan amount. However, some lenders can offer a higher value for the assets/collateral that is more liquid.
The eligibility criteria
Before applying for a loan, you must first ensure that you meet the loan against assets eligibility criteria. All you need for a digital loan against securities are your KYC documents, photograph, and financial assets to your name. Also, the borrowers must be 18 years or above and an Indian citizens. If you meet these criteria, you can avail of the loan within hours.
Financial assets that can be pledged as collateral
Assets that serve as collateral include equity shares, mutual funds, insurance policies, FDs, and fixed maturity plans. That means if you have investments in Mutual Funds, you can pledge them to get a loan against mutual funds.
The loan process
The process of getting an instant loan against assets is simple and quick. If you choose the right lender, it will take you just hours to get the loan approved and disbursed. For example, Abhiloans, a leading NBFC registered with RBI, promises to credit the loan in your account within 4 hours. The secured and digital application makes it possible. The documents needed include KYC papers, the applicant’s photographs, and banking details.
The interest rate
The loan against assets interest rate is one of the most crucial factors to consider when approaching a lender for a loan. It might usually fall between 8.5 to 16% per annum, varying from lender to lender. However, if you find a lender like Abhiloans, the interest rates could start from 0.67 %/per month flat or 8% per annum flat.
What if you default on the EMI?
If the borrower defaults on EMIs, the lender can liquidate the securities pledged for the loan. Missed repayments may also attract penalties, such as collection charges and legal charges. So, before taking a loan on mutual funds or other financial securities, evaluate your repayment capabilities as to how much you can afford monthly EMIs, and select an EMI plan accordingly to avoid incurring those charges.
The bottom line is that an instant loan against assets or a digital loan against securities is a prudent choice that allows you to leverage your financial assets to raise quick funds in dire need. But then you must be aware of the points above to crack the best deal for your requirements. So, when applying for a loan, consider everything, from the loan against assets eligibility criteria to the loan against assets interest rates.