When borrowers in need don't shy away from taking a loan against property or any other hard asset, why should securities be any different? In fact, loan against securities that can be equity or debt-linked, hybrid or derivative-based allows individuals or institutions to raise substantial funds, especially during rising stock markets. Why?
Consider a securities tool like equity mutual funds. Since most financial institutions may offer a loan up to 60% of the market value of such funds, you will become entitled to a higher loan amount when the stock market is up. This logic is true for any type of securities you may pledge in exchange for a loan during rising stock markets.
Crucial Factors to Consider Before Applying for Loan Against Securities
Whether you are borrowing against shares or any other securities tool, here are the five things you must know about this lending tool.
1. Works Like an Overdraft Facility
You must have come across the term “overdraft”. Account holders often use an overdraft facility where they take a loan by pledging their fixed deposit. Similarly, lenders provide a loan against securities as an overdraft facility. What they do is they sanction a lump sum credit limit based on the number of securities pledged by a borrower.
Now, the borrower may take the entire sanctioned amount in one go, in parts, or may only end up using it partially. Either way, they pay interest only on the amount utilised and not the total sanctioned credit limit.
Also, the loan against securities interest rates is often affordable, and borrowers can keep withdrawing partially or fully and repaying it multiple times till this facility expires.
A critical thing to note here is that market volatilities can fluctuate the loan against securities interest rates. How? Lenders periodically revalue the borrower-pledged securities. If market corrections reduce your securities value to a point where the drawn amount is more, you may have to pledge more securities or pay the balance by cash or cheque. This scenario does not occur if you take a loan against securities during rising stock markets.
2. Flexible Repayment and Prepayment
Since loans against securities work like overdrafts, they automatically provide repayment and prepayment flexibility. Depending on your disposable income, you can either service the interest component each month and leave the principal for the later part of the tenure. Doing this ensures you pay low EMIs.
Alternatively, you can also furnish the principal component of your loan by making bigger payments each month and closing your loan early. This is called prepayment, and there is no penalty for it.
Safe to say, a loan against securities offers optimal flexibility for managing your cash flow and subsequent debt obligation. You can pay however and whenever you want, as long as you don’t default on your minimum monthly EMI and close all payments before your tenure is up.
3. Flexible End-Usage
As a borrower, you don't need to state the purpose of funds taken as a loan. There is no restriction on the end-use of the sum borrowed against securities. So, whether you wish to fund your child's higher education, pay hefty medical bills, or take a trip abroad, all of it is possible by availing a loan against securities.
If you can find an affordable loan against securities interest rate, you can also use it to manage short-term business cash flows, purchase a vehicle or manage any credit card debt.
4. Different Securities Carry Different LTV
Most lending institutions feature a list of securities they offer a loan against. These often include types of mutual funds, shares, bonds, etc. Each asset class has a different Loan-to-Value ratio. Therefore, which tool you pledge will determine the percentage of the loan you can get.
For example, the loan against shares maximum limit offered by lenders can go up to 75% of the total shares pledged. This number comes down to 60% if you want to pledge equity mutual funds.
The loan against shares maximum limit or the LTV regulatory caps for all other asset classes are assigned by the RBI.
5. Immune to Credit Rating
Since loan against securities is backed by collateral and has modest LTV ratios, lenders remain agnostic to credit rating or CIBIL scores of applicants borrowing them.
CIBIL scores measure a borrower's repayment capability and creditworthiness. However, in this case, the loan is already secured against financial securities. Therefore, lenders take a more relaxed approach in awarding this type of loan.
In the End
Lending against shares and other securities can help borrowers expense big-ticket purchases and much more. So, if you want to avail of such a loan, partner with Tata Capital. We offer different types of loans, including loans against securities at affordable interest rates, speedy processing and flexible repayment terms.
To know more or start an online loan application, visit our website today!
30 January 2023
5 mins read
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