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Here's how loan against securities is a better option than personal loans

Interest rates on loans against securities are lower and they come with flexible repayment options

Tinesh Bhasin 

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Instead of liquidating your investments during emergencies, a better option could be to take a loan against them

The investments continue to grow while pledged, and the borrower continues to receive dividends, bonuses, etc, during the period of the loan

There are many securities a borrower can to get a loan. Common ones include demat shares, (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. They may, for example, accept from specific fund houses only or life insurance from three-four companies.

Many banks provide this list on their websites.

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 the security. For a debt fund, for example, a lender can give a loan up to 80 per cent of value. In the case of equities, it’s usually 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 this loan, don’t go overboard and limit yourself to the amount you need.

First Published: Fri, May 24 2019. 14:06 IST
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