Financial emergency? Loan against securities cheaper, but comes with riders

Lenders give money against selective stocks, mutual funds and bonds

• If you are looking to borrow funds in an emergency, taking a loan against security (LAS) is a better option than liquidating your assets
• Securities a borrower can pledge include demat shares, mutual funds (equity as well as debt), insurance policies and bonds. For each of these instruments, lenders have a list of what is acceptable and what is not
• LAS comes with lower interest rates and processing fee compared to personal loans, and also has flexible repayment options
• The interest rate could vary depending on the type of security and the credit score of the borrower
• While there are no prepayment or foreclosure charges, there could be other charges such as processing charge, overdraft maintenance fee, stamp duty on the loan agreement, pledge creation fee, de-pledge fee, annual maintenance charges, etc
• The loan-to-value ratio depends on security. For a debt fund, for example, a lender can give a loan up to 80 per cent of the value. In the case of equities, it’s 50-60 per cent
• As the value of security could fluctuate, the lender has the right to invoke and sell the security when the outstanding amount reaches closer to the value of the underlying asset. In such situations, the borrower might be required to offer more security as collateral
• If you are availing of LAS, don’t go overboard and limit yourself to the amount you need