Are you in urgent need of funds to meet a financial emergency but don’t know how to arrange the required amount? Thinking of selling your shares and getting the required funds? If yes, then remove this thought from your mind as you can choose another alternative solution of getting a loan against securities without actually selling them.
Read on this post to discover more detailed information about this loan and its benefits.
What is a Loan Against Securities or LAS?
It is a loan where you pledge your life insurance policies, shares, fixed deposits (FDs), ETFs (exchange-traded funds), or mutual funds as collateral to the bank or NBFCs (non-banking financial companies) to secure a loan. Businesses and individuals can pledge their securities to access extra funds without liquidating those securities. This type of loan is gaining more popularity to meet financial emergencies or specific short or long-term goals.
How does Loan Against Securities Work?
As mentioned above, these loans are provided against eligible securities as an overdraft facility in an applicant’s bank account. The lender evaluates the cumulative value and liquidity of the securities to determine the loan amount.
An applicant can withdraw the credit amount from their account and pay the interest on the amount used for the duration of usage. The securities are held by the financing institution until the loan amount is repaid completely.
For example, you are offered Rs. 300,000 against your securities and you withdraw just Rs. 100,000 for two months, then you will have to pay interest only on Rs. 100,000 during the period of two months.
Sometimes, a loan against security can be given as a demand loan, which banks or lenders may settle after a specified duration, mainly up to 1 year. Flexible repayment terms allow combining interest-only payments with principal offset against collateral or interest and principal payments.
Features and Benefits of Loan Against Securities
➢ Convenient way to get funds without the lengthy approval process and fund disbursement.
➢ Lower interest rates than unsecured loans such as interest rates for credit cards or personal loans.
➢ Getting funds without selling securities or investments allows borrowers to enjoy the benefits from their investment’s appreciation while pledging them as collateral to a bank.
➢ Immense repayment flexibility enables applicants to select partial or full repayment according to their convenience. This is primarily beneficial for borrowers having irregular income.
How to Apply for a Loan Against Security?
Application form submission: Submit an application form along with essential documents to the financing institution.
Security evaluation: The lender will evaluate the value of pledged securities or investments to identify the loan amount.
Loan agreement: After determining the loan amount, a borrower needs to agree to the T&Cs (terms and conditions).
Pledging of securities: An applicant will pledge the securities as collateral for a loan.
Funds disbursement: Once the loan agreement is done and securities are pledged, the funds are credited to the borrower’s bank account.
What is the Difference Between a Loan Against Security and a Loan Against Property?
LAS is a loan where an applicant pledges their securities such as life insurance policies, stocks, bonds, and other financial assets as collateral to the non-banking financing companies or banks against the loan amount.
A loan against property (LAP), on the other hand, is a mortgage loan provided to companies and individuals against their residential or commercial property. The loan amount credited is equivalent to the present value of the mortgaged property.
No credit score limit is required for LAS while applying for LAP needs a credit score above 750. Moreover, the interest rates of loans against security are lower than a loan against properties. There is one common similarity among both types of loan i.e. flexible repayment tenures.
Eligibility Criteria for Loan Against Securities
Eligibility criteria can differ for loan against security based on the lender you are choosing. Here are some of the common requirements that need to be followed –
➔ An applicant needs to be an Indian resident or citizen.
➔ The borrower must be 18 years old or above.
➔ A good repayment history and credit score are mandatory.
➔ A stable source of income is required to show repayment ability.
➔ The value of the shares pledged should fulfil the lender’s minimum requirements.
➔ An applicant must have an eligible security and a demat account to pledge as collateral.
Charges or Fees Required for Loan Against Securities
● The interest rate on the borrowed amount.
● Penalties in the form of late fees or default.
●Some lenders may charge processing fees for starting the loan application process.
●Some financing institutions may levy charges in case the loan is repaid completely before the end of the tenure.
● Legal fees, insurance, stamp duty, and valuation fees are other miscellaneous charges some lenders may apply.
Factors Affecting Interest Rates of Loan Against Securities
● The interest rate may differ based on the type of pledged security.
● Larger loan amounts may be related to lower interest rates.
● Current market situations such as economic trends, inflation, and changes in interest rates.
● Longer tenures may be related to higher rates of interest.
● An applicant with a strong credit score (CIBIL score) and repayment history can get Loan Against Securities at lower interest rates.
Wrapping Up
Loan against security is the most powerful financial tool that enables businesses and individuals to unlock the power of their investments or shares to get funds and meet their financial needs. It provides an applicant with quick access to funds at lower interest rates while keep enjoying the benefits of their securities or investment. However, be sure to read the terms and conditions thoroughly and carefully to access efficient and flexible solutions for your financial needs.
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