There are many ways to get funding. But when an individual requires funds in an emergency and he does not know how to get them, he typically applies for a personal loan. But somehow the borrower’s eligibility may not match with the required criteria. In this case, the borrower can get funded through a “Loan against Securities”.
- 1. It is an overdraft facility in which borrower can pledge financial instruments like bonds, shares, and mutual funds and get the loan.
- 2. It is a loan which is given to borrower against the shares, which are held in their Demat Account.
- 3. The biggest benefit of this is that the borrower can get instant liquidity without selling their securities. When one repays the debt he or she gets back the shares from the bank as there is no liquidation of the actual stock units.
- 4. The following are approved securities:
- – Non-Convertible Debentures
- – Mutual Fund Units
- – NABARD Bonds
- – Demat Shares
- – UTI Bonds
- – NSC/KVP (Accepted only in Demat form)
- – Insurance Policies etc.
Amount–The range usually lies between Rs. 50,000 to 20 lakh.
Tenure of loan – It is taken for a shorter period up to 1 year.
Rate of Interest – 12% – 15%
Generally, Loan Against Securities comes under the Personal Loans sector. The value of deployment in individual shares and bonds gradually increases because the popularity and awareness of such loans are increasing today.
How does Loan Against Securities work?
All banks have conveyed the list of shares, mutual fund schemes, LIC policies etc. which they will accept as collateral. These securities are very liquid and highly valued securities. On the basis of the portfolio, the bank will decide the amount of the loan. For example, if the borrower’s stock portfolio for shares is Rs. 50 lakh, he/she can get a loan up to Rs. 25 lakh against the stock portfolio.
The borrower is only pledging securities, he is not transferring ownership.
No personal guarantor is required.
The interest is only on the amount which he can utilize, and not on the entire loan amount.
An individual cannot only borrow against their own shares, he/she can also pledge the shares of their spouse, children (above 18 years of age), parents, siblings, in-laws, grandparents, and grandchildren.
I hope the next time when borrowers look to raise funds for an emergency; they remember that a loan against their security investments can be a better option compared to other traditional avenues.
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