For individuals and small businesses, investing in a financial asset can be profitable in the long term. Especially during a shortage of funds, when liquidating assets is seen as a way to meet unexpected financial demands. However, a more beneficial approach to avail funds is to pledge financial assets as securities and avail a loan against them.
What Is a Loan Against Securities?
A loan against securities is a type of loan borrowed by pledging or keeping securities such as bonds, shares, units, or mutual funds as collateral with a lending institution. The loan amount is made available to the borrower through an overdraft facility.
The overdraft facility comes with a credit limit and allows the borrower to withdraw any sum of money when a need arises. The overdraft limit and the interest rate charged on the loan amount are directly based upon the nature of securities.
Listed below are five important rules that one must follow while taking out a loan against securities.
Choose the lender wisely
If you have a strong portfolio of financial assets, you might avail a higher loan amount for your securities. Every lender provides a list of approved securities that can be used as collateral. Ensure that you choose a lender that approves a wider range of financial assets. If you have varied assets as collaterals, it will further enhance your creditworthiness.
Additional Read:- Tips to Qualify for Availing Loan Against Security
Consider flexible repayment tenure
A loan against securities is a secured loan and therefore, more flexible. Since the loan is taken against collateral, you also enjoy lower rates of interests in comparison to a personal loan. The interest is charged monthly on the outstanding balance in the overdraft account. When you apply for this loan, consider a lender that offers flexible repayment facility.
Review the overdraft terms
Each overdraft facility comes with an approved credit limit. Borrowers can withdraw any amount of money from the overdraft facility, provided they don’t go over the stipulated limit. Since an overdraft facility is the primary credit agreement with a lender, borrowers must not overlook how their collaterals are valued or the limit imposed on the credit flow. Therefore, reviewing the overdraft terms with the lender is highly recommended.
Estimate the collateral value
Lenders evaluate the worth of your financial assets before approving a loan amount or a credit limit on the overdraft facility. Therefore, the nature of collateral directly affects the nature of lien that will be used for it. In case you pledge volatile financial assets as collateral and their value falls, the lender might ask you to replenish the loss by pledging other securities. Thus, ensure you have a fair estimation of the market price for your collateral.
Learn about the hidden charges
Lenders often charge a maintenance fee for providing the overdraft facility. Other charges may include a processing fee for the credit agreement. Additional interest may also be charged from a borrower if the approved limit falls short of the availed loan amount. Learning about such hidden charges can help borrowers in managing loan servicing efficiently.
Additional Read:- How Does a Loan Against Security Work?
If you are thinking of liquidating your assets to deal with a financial emergency, think again! A loan against securities will not only help you retain said assets but will also ensure that you have enough working capital to cover the daily costs of running your business.