Summary: Loans against securities can be an excellent option for funding. However, there are a few things they must take into consideration before putting in their request. This article explores the main aspects.
A loan against security is a secured loan wherein you pledge collateral to the lender or financial institute against your loan. Although this type of loan is not the quickest to acquire, it does have a relatively lower interest rate. Lenders have a fixed list of securities they accept as collateral, the information on which is available on their official website.
Some securities that you can avail loan against security are:
- Loan against mutual funds
- Insurance policies
- Loan against stocks or Bonds
Lenders mainly offer 50% to 60% of the security’s value as the loan amount. In case you need a higher loan, you will be asked to pledge additional securities. This can also happen if the value of securities depreciates during the loan’s tenure and the lender incurs a loss. The following are key things to know before taking a loan against stocks or mutual funds in India.
The eligibility for loans against securities is very standard, and it calls for certain documents to be submitted in order to avail of it. These documents play a significant role in the process, and they include:
- Income and employment proofs
- KYC documents
- Other supporting documents
- Overdraft account-related documents
- Security-related documents
If the borrower fails to submit these documents, their loan request will be rejected or put on hold until they are made available. In addition to this, the rejection of a loan, especially a business-related loan, is bound to give you a bad reputation with financial institutions and negatively impacts your credit history. Therefore, it can hinder the process of availing loans in the future. Having all your documents in place is vital to make sure there are no delays in the process of approval.
Loan Amount and Tenure
Different financial institutions have other ways to determine the loan amount and tenure based on the borrower’s portfolio. When you are availing a loan against stocks of mutual funds for the first time, it is in your best interest to consult a financial advisor before deciding a tenure and loan amount. Doing so will ensure that you maximise the value of your portfolio.
Assessment of Portfolio
The central aspect of a loan against stocks of mutual funds is the security pledged and its value. Therefore, it is crucial to ensure the securities are financially viable. This means that securities must keep their value to make sure the health of your portfolio stays intact. When evaluating your security, it is important to determine the current value and its relevance and look at it from a long-term perspective.
If the lenders notice a dip in the value of your securities, they might ask you to provide more securities as a way to compensate. Hence, prior to deciding what you want to secure and how much you are willing to confirm, it is always in your best interest to assess the portfolio thoroughly yourself before handing it over to the lender.
Interest Rate for Loans Against Securities
The interest rates for loans against securities is comparatively lower since it involves collateral. Additionally, the interest is not imposed on the entire sum value of the securities. It is only levied on the amount you use from the overdraft account. The overdraft account is assigned to you and has the loan amount disbursed to it (a percentage of the value of securities). You must ensure that you have done extensive research before committing to a lender because this is a long-term commitment and will have a lot of your assets at stake.
Extra Charges and Fees
Some financial institutions charge you prepayment penalties. A penalty like this is levied if you disburse the loan before the tenure matures via sources apart from your personal funds. Is it essential that you look at the several fees and penalties that different lenders may levy before confirming your loan with a particular institution.
Before jumping into the process, take the points mentioned above into account, and you will be all set! Why settle for a loan that has higher interest rates when you can pledge your pre-existing assets to get more competitive interest rates? A loan against stocks and mutual funds helps you do precisely that.
After collating the necessary documents, you can begin your online application process by visiting your lenders website or a physical lender branch. After going through your financial statements, your lender decides if you are a viable risk and sanctions the loan. Many financial institutions offer instant loan approvals today when you follow the online process.