What Is Meant By A Loan Against Securities?
A loan against security is a loan where the customers pledge the shares, funds, or policies as collateral to the financial institutions to avail loan. The loan against security can be given for the following securities:
- Insurance policies
- Demat shares
- National Savings Certificate or KVP
- Non-convertible debentures
- NABARD Bonds
- UTI Bonds
- Mutual fund units
Nonetheless, the approved list of securities and the corresponding Loan to value percentage offered varies between lender to lender. Customers should read through the rules and regulations of the banks or financial institutions before pledging for the loan.
How Does A Loan Against Securities Scheme Work?
The customer can withdraw the amount based on the collateral submitted. A current account is opened with the borrower’s name, and the interest is calculated based on the loan amount taken and the period of utilization. Therefore, it provides :
- An overdraft or line of credit facility
- Easy withdrawal for instant liquidity
- Limited interest
Loan Against Security Interest Rates And Tenure
The tenure for the loan against security is generally one year, but it can be renewed. The interest rates are usually between 12%-15%. The financial institutions will also charge 2% of the loan amount as a processing fee.
However, the rate offered and the processing fee varies from financial institutions. The loan against securities interest rates also ranges based on the institution applied.
E.g., with platforms such as Fullerton, the interest rate rationale is as follows.
|Interest rate offered||11 to 18 % p.a|
3 % of the loan amount
- The borrower should be between at least 21 years old
- Should be a resident of India
- The applicant should be salaried or self-employed
- The financial institutions should approve the securities submitted. Also, security should be movable, marketable, and free from disabilities. The value of the security should not widely fluctuate.
Checkpoints to consider before availing the loan
Customers should consider the following key points before signing up for the loan.
- Check the eligibility criteria set by the financial institution.
- Select institutions that accept varied investments as security
- Avail loan that offer high sanction for the collateral with low-interest rates
- Choose financial institutions that offer flexible repayment tenure.
With a high loan to collateral value, investors can obtain an instant disbursal of money without selling their securities through a loan against securities. The loan is dependent only on the security and is independent of the credit rating of the borrower, making it highly accessible.
However, customers should note that the repayment must be made within the defined time. Failing to do so could result in a recovery case filed by the lender against the borrower. Upon which the customer must repay the amount within three years from the loan sanctioned date.