In times of emergencies and financial crisis, instead of selling off and liquidating investments, taking a loan against securities is a better alternative. Having said so, even though the process for a loan against securities is not very quick, it comes with a lower interest rate.
Any type of securities can be pledged, such as shares, equity or debt mutual funds, insurance policies and bonds to raise money.
Additionally, as the security stays with the lender, it can continue to grow, and at the same time, you can also get your loan instead of giving up on your investments.
Industry experts say one can opt for this option instead of liquidating his/her investments. While the investments stay with the lender, not only do they continue to grow while they are pledged but also the investor continues to receive dividends, bonuses, etc., during the loan period.
Before opting for a loan, however, check with the lenders, do they accept the securities that you have. Most lenders usually have a list of securities available on their websites, they are willing to accept.
For instance, a particular bank in the case of life insurance policies, or mutual funds could have a specified list of companies, that they accept, or could accept only the top 100 companies, in the case of stocks.
Also, in the case of equities, a lender could offer 50 or 60 per cent of the value of the securities as a loan, which could increase in the case of debt funds or bonds. Some lenders also ask for additional securities if the value of securities falls during the loan tenure.
These LAS are short tenure loans, usually with a tenure of up to 36 months. With some banks, the borrower can choose from flexible repayment option and can pay interest every month and principal at the end of the loan tenure.
A loan against securities also comes with various charges – for instance, besides processing charges, depending on the loan provider, a borrower could be charged stamp duty on the loan agreement, pledge creation fee, etc.