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About Loan Against Securities

Often, there are trying times in one’s life which calls for financial assistance. Loans from financial institutions come to the rescue. There are many types of loans that any financial institution offers, the borrower should try to look out for favorable terms and should assess the suitability prior to taking required assistance. If the individual or applicant has investments, then there is the option of taking loan against such investments or securities. Loan against securities is typically for short term and the quantum of loan is low. Loans against securities are secured loans wherein the securities are the collateral. These loans can be used for a variety of requirements – vacation, travel, medical emergencies, education etc.

Loan Against Securities
Loan Against Securities

How Loan Against Securities Works

Loan against securities are loans extended by banks and NBFCs (Non-Banking Financial Corporations). These are secured loans, wherein the securities are offered as collateral. The securities which are acceptable as collateral include shares, mutual funds, fixed deposits, insurance policies. The loan value would depend on the cash value of the securities all put together. These types of loans are offered as an overdraft facility on the securities once they are pledged with the financial institution. The funds required can be withdrawn from this overdraft facility, the interest must be paid only on the funds withdrawn and for the period for which the funds are used.

To understand this, here is an example, if the securities are worth Rs. 1 Lakh and the same is available as loan to the prospective borrower and the borrower withdraws only Rs. 20,000 for a period of 3 months. The borrower is required to pay interest only on Rs. 20,000 for the period of 3 months only. The overdraft facility has the flexibility of repayment in the form of repayment of interest and principal or repayment of interest only with principal being set-off against collateral or set-off of entire borrowing against underlying security. The loan can also be extended in the form of demand loan (term loan), in such case the financial institution could liquidate the loan after a certain period. Typically, the maximum period allowed would be 30 months.

List of securities eligible for the loan

Not all forms of investments are eligible for loan, also, the loan value against the cash value of each security may differ from lender to lender. If the investment is risk-free, then the percentage to cash value extended as loan will be higher. In the case of high-risk instrument, the percentage to cash value extended as loan will be lower (typically, 50% in the case of equity shares). The list of securities which are eligible for loan are –

  • Insurance policies – unit linked endowment plans, income plans, conventional endowment plans (excluding term insurance policies)
  • Non-convertible debentures or warrants
  • National Savings Certificate or Kisan Vikas Patra
  • NABARD bonds or Government bonds
  • UTI bonds
  • Fixed deposits
  • Mutual fund units
  • Demat shares

Features of Loans Against Securities

The key features and benefits of loans against securities are -

  • Loan against securities is offered by banks, NBFCs or other financial institutions
  • These loans are offered to Resident Indians; many financial institutions have extended this facility to other categories such as HUF, partnership firm, business, limited companies or any entity with securities eligible for loan on a case to case basis
  • NRI – Non-resident individual are eligible for funding against equity and debt mutual funds or shares held in their own names
  • Loan value would depend on the cash value of the securities
  • Security should be easily marketable, transferable and liquid assets are preferred
  • Security value can fluctuate but should not fluctuate too much and should be one which will not incur loss
  • Loan against securities are offered as an overdraft facility
  • Flexible withdrawal, tenure and repayment schedule is available for this type of loan
  • Charges for overdraft account maintenance, processing, stamp duty for agreement of loan
  • ATM and internet banking facilities available on the overdraft facility

Eligibility and purpose of availing Loan Against Securities

The financial institution provides the loan to individuals above 18 years of age. The prospective borrower should hold securities in either physical or demat form. The loan can be availed in the same name as in the securities, normally, the loan is extended in single name.

These loans are typically short term in nature and the quantum of loan would be lower. These loans can be used to meet contingencies and needs which are personal. Often, loans can be availed to subscribe to new public issue, investment etc. These loans are extended as an overdraft facility and hence, it is ideal for any expense centre where the exact cost cannot be determined.

Documentation required for Loan Against Securities

The documentation required for this type of loan is minimal. The following documents have to be submitted to avail loan against securities –

  • Duly filled application form
  • Self-attested income tax return for past 2 years
  • Self-attested bank statement of last 3 months
  • Client master list for relevant demat account (for digitized securities)
  • Self-attested statements or policy documents or relevant documents
  • Surrender value report if borrowed against insurance policies

Benefits of Loan Against Securities

  • These loans are quick and easy to avail, the processing is minimal considering that this is a secured loan
  • The loan value is always lower than the cash value of the investment, in the event of cash value closing in on the outstanding loan value, the lender may request for additional security or liquidate the collateral and close the outstanding loan
  • Loan value can be anywhere between 50% - 90% of underlying collateral (50% for equity shares and 90% for bank deposits, insurance policy surrender value)
  • Eligibility of loan is not dependent on the borrower’s credit score
  • Flexible repayment schedule allowed; as compared to other types of loan which follows the equated monthly installment (EMI) routine
  • Interest rate is lower in the case of loan against securities since this is a secured loan
  • Interest is charged on a monthly basis for the daily outstanding balance of funds being utilized and for the period it is utilized
  • No pre-payment penalty is applicable on these loans
  • Minimal documentation and low processing charges are applicable

Digital Loan Against Securities

If the securities held are in digital format, the loan against such securities can be availed using internet banking facility. This offers the convenience of availing the loan within minimal hassle. There is no paper work involved and the processing / disbursement of loan is done with no delay. This breakthrough loan sanction also enables the borrower to set the loan limit as per the requirement. The loan is disbursed instantly via net banking.

Loans against securities are a great choice when there is an immediate requirement for funds. This is a great alternate to selling valuable investments at low prices. The loan is effective in catering to short term needs and those needs where the exact cost or expense is unknown. The interest rate is lower than personal loans, the processing is quicker and hassle free. The repayment can be aligned to the borrowers cash flow as well. The interest is charged only on the funds utilized from the overdraft facility and for the period the funds are utilized. Most of the nationalized banks extend this type of loan to its customers.

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