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Tata Capital > Blog > Loan on Securities > Loan Against Bonds: Know Its Meaning and Definition

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Loan Against Bonds: Know Its Meaning and Definition

Loan Against Bonds: Know Its Meaning and Definition

Bonds are debt instruments issued by governments and corporations to raise capital. Investors who purchase bonds receive regular interest payments as well as repayment of the bond’s face value when it matures.

Bonds can provide steady income streams and diversification for investment portfolios. However, some bondholders may need access to cash before a bond matures. This is where a loan against bonds can come in handy.

Loans against bonds allow investors to tap into their portfolio value to meet liquidity needs. This article highlights everything you need to know about loans against bonds from their meaning, how they can benefit you to loan on bonds rate of interest.

What is a Loan Against Bonds?

With a loan against bonds, also referred to as a bond loan, an investor pledges their bond holdings as collateral to obtain a loan, without having to sell the bonds. The investor retains ownership of the bonds, which are held as security by the lender for the duration of the loan.

Unlike selling the bonds, taking a loan against them allows the investor to access cash value while still earning interest income and retaining the potential for price appreciation on the bond investment. You can even avail of a loan against an LIC bond.

Here are the main features of loans on bonds:

1. Borrowers can monetise their bond investment without selling bonds.

2. Bonds continue accumulating interest and can be reclaimed when the loan is repaid.

3. Borrowers can use freed-up capital for other investments.

Types of Loans Against Bonds: Government & Corporate Bonds Compared

There are two primary types of loans against bonds based on the bond category: Loan against corporate bonds and those against government bonds. 

Government bonds: These include securities like Government of India bonds, Treasury bills, and state development loans. They are issued by central or state governments and are considered highly secure due to sovereign backing. As a result, lenders typically offer higher loan-to-value (LTV) ratios, lower interest rates, and longer repayment tenures for loan against government bonds. The approval process is generally faster, as the risk of default is minimal.

Corporate bonds: These are issued by private or public companies and carry varying levels of risk depending on the issuer’s credit rating. Bonds issued by highly rated corporations may attract competitive loan terms, although usually with lower LTV ratios and slightly higher loan against corporate bonds interest rates than government bonds. Loan against corporate bonds that are lower-rated are subject to stricter lending conditions.

Benefits of loans against bonds

Loans against bonds offer various benefits:

1. Hybrid Term Loan Facility: Many lenders provide a hybrid term loan facility on loans against bonds.

2. No foreclosure fees: Some lenders do not charge prepayment, foreclosure or other penalties for early repayment of a loan on bonds. Borrowers can repay ahead of schedule without incurring additional fees, which supports financial flexibility.

3. Digital paperless process: Loans against bonds can often be availed completely online, with digital documentation and account opening. This results in a seamless and convenient experience for the borrower.

4. Quick access to funds: The approval process is faster compared to other lending options since bonds are used as collateral. Borrowers can access funds quickly in case of urgent needs.

5. Retain bond ownership: A key advantage of a loan against bonds is that the investor retains full ownership of the bonds used as collateral. They continue to receive interest payments and benefit from potential appreciation in the bonds’ value.

6. Collateral swap: If the bond prices fluctuate, borrowers may be allowed to swap the bonds offered as collateral with other eligible bonds of equivalent value. This helps optimise the collateral securities.

7. High loan amount: Lenders frequently offer 50% to 70% of the market value of bonds as a loan amount. So, borrowers can avail of a substantial loan against their bond portfolio value.

Loan Against Bonds Interest Rates: What to Expect & Factors Affecting Rates

The loan against bonds interest rates typically varies between 8% to 14%. The actual rate depends on several factors, such as:

Type of Bonds: Government bonds attract lower loan against bonds interest rates due to sovereign guarantee and zero default risk. Loan against corporate bonds, on the other hand, attract higher rates based on the issuing company’s creditworthiness and rating.

Your Credit Profile: Your CIBIL score and existing relationship with the lender can influence the final loan against bonds interest rates offered, with scores above 750 receiving preferential treatment.

Credit Rating: Higher-rated bonds also receive preferential loan against bonds interest rates, while lower-rated bonds face premium pricing due to increased risk perception by lenders.

How to apply for a loan against bonds?

Here is how you can apply for a loan against bonds:

1. Offline application process

To apply for a loan against government bonds or corporate bonds offline, you can visit the nearest lender branch. At the branch, you will fill out a loan application form providing personal and financial details. You must carry the bond certificates and other paperwork to be offered as collateral. The lender will verify the documents and details provided. If approved, the loan agreement can be signed at the branch and disbursal initiated.

2. Online application process

Many lenders now offer the option to apply for a loan against bonds completely online for faster processing. You can visit the lender’s website, fill out the application form online and provide the required information. The lender will electronically verify credentials and eligibility.

If approved, documentation for the loan agreement will be completed online and the loan amount disbursed to your account. The bonds can be transferred to the lender’s demat account through online banking. Online applications make availing loans against bonds quick, convenient and paperless.

The below mentioned details like eligibility & documents required are subject to change from time to time and from vendor to vendor.

Eligibility criteria to avail of loans against bonds

Below are the eligibility criteria to avail of a loan against bonds:

1. The applicant must officially be a citizen of India.

2. The bonds pledged should be in the demat form.

3. The applicant must be 18 years or above.

Required Documents for Loan Against Bonds

The table below highlights the documents required to apply for a loan against bonds:

Entity typeDocuments required
IndividualsPAN Card, ID Proof, Address Proof, Signature Proof, Income Proof, Bond Certificates
ProprietorshipsID Proof, Address Proof, Signature Proof, Business Registration Proof, Income Tax Returns, Bond Certificates
PartnershipsID Proof, Address Proof, Signature Proof, Partnership Deed, Registration Certificate, PAN of Firm, Authorization Letter, Bond Certificates
Limited Liability Partnerships (LLPs)Same as Partnerships
CompaniesID Proof, Address Proof, Signature Proof, Certificate of Incorporation, MOA & AOA, PAN of Company, Board Resolution, Bond Certificates
Hindu Undivided Families (HUFs)PAN Card, ID Proof of Karta, Address Proof of Karta, Signature Proof of Karta, HUF Deed, Bank Statement of HUF, Bond Certificates
TrustsTrust Deed, PAN Card of Trust, ID Proof of Trustees, Address Proof of Trustees, Signature Proof of Trustees, Resolution of Trustees, Bond Certificates

Top Uses & Scenarios for Taking a Loan Against Bonds in India

A loan against bonds is a practical financing option for individuals who want liquidity but cannot liquidate their investments. In India, it is commonly used to meet short-term funding needs while allowing you to earn interest on your bond holdings.

One of the most common uses is business financing. Businesses might need it to meet urgent working capital requirements or fund your expansion plans. 

You may also opt for a loan against bonds to cover education expenses, including tuition fees and overseas studies, or medical emergencies, where quick access to funds is essential.

Additionally, these loans are used for portfolio diversification, enabling investors to invest in other assets without selling bonds. 

Overall, loans against bonds offer flexibility, competitive interest rates, and efficient access to funds while preserving long-term investments.

Loan-to-Value Ratio (LTV): How Much Can You Borrow Against Bonds?

The Loan-to-Value (LTV) ratio is a metric that decides how much you can borrow against your bond holdings. Loan against government bonds usually qualify for higher LTVs due to their low risk, while corporate bonds may attract lower limits depending on the issuer’s credit rating.

Other factors such as bond maturity, price volatility, and lender policies also influence the final LTV offered. 

For example, if the LTV is 70% and if the market value of your bonds is ₹10 lakh, you may be eligible for a loan of up to ₹7 lakh. 

Risks and Things to Check Before Taking Loan on Bonds

Before applying for a loan on bonds, consider the following things:

  • Choose Stable Bonds: Use bonds with consistent values rather than volatile securities to avoid margin calls and secure better loan terms from lenders. 
  • Interest Rate Comparison: Verify that the loan interest rate doesn’t exceed your bond’s returns, as borrowing at higher rates than what you earn creates a financial loss.
  • Hidden Charges: Check for processing fees, prepayment penalties, and other costs that can increase your effective borrowing expense.
  • Borrow Within Capacity: Assess your repayment ability carefully and borrow only what you can comfortably repay to prevent defaults and credit score damage.

Conclusion

Loans against bonds allow investors to unlock the value of their bond portfolio without liquidating their holdings. You can avail of a loan against RBI bonds or others, to optimise your finances. Ensure that you compare the loan against bonds interest rates and other terms before finalising a lender.

Loans against securities from Tata Capital provide a convenient way for investors to access financing against their bond portfolio. We offer competitive loan against securities interest rates along with minimal eligibility criteria. The documents required for loan against securities are simple – just PAN card, ID proof, address proof and bond certificates in demat form. You can apply online or visit a Tata Capital branch to avail hassle-free financing against your bonds.Visit the Tata Capital website or download the Tata Capital App for more information!

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FAQs

What is the typical interest rate for loan against bonds in India?

Typically, the interest rate for loan on bonds in India ranges between 8% to 14%, with loan against government bonds attracting lower rates and corporate bonds commanding higher rates. 

Can I get a loan against both government and corporate bonds?

Yes, you can get loans against both government and corporate bonds. However, government bonds offer higher loan-to-value ratios and lower interest rates than corporate bonds.

How much loan amount can I get against my bonds?

The exact loan amount depends on the loan to value (LTV) ratio, bond type, and market value. Typically, lenders offer 60%-80% of the bond’s current value as a loan.

What are the main advantages of a loan against bonds vs. selling them?

Loans against bonds let you retain ownership, continue earning interest income, maintain long-term investment strategy, and access liquidity without losing future returns or selling during unfavourable market conditions.

How is the loan against bonds disbursed and repaid?

Loan against bonds is disbursed directly to your bank account after pledge completion, usually within 24 to 48 hours. Repayment happens through EMIs, with bonds released immediately upon full repayment.

What are the risks if I default on a loan against bonds?

If you default, lenders can liquidate your pledged bonds to recover dues, causing permanent loss of investment and future interest income. You'll also face credit score damage, legal action, and added fees and penalties.

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