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 against 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 against 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.
Benefits of loans against bonds
Loans against bonds offer various benefits:
1. Overdraft facility: Many lenders provide an overdraft facility on loans against bonds. This allows the borrower to get additional funds later if needed, by pledging more bonds as collateral. This flexibility helps meet unanticipated liquidity needs during the loan tenure.
2. No foreclosure fees: Some lenders do not charge prepayment, foreclosure or other penalties for early repayment of a loan against 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.
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 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.
Documents required to apply for a loan against bonds
The table below highlights the documents required to apply for a loan against bonds:
Entity type
Documents required
Individuals
PAN Card, ID Proof, Address Proof, Signature Proof, Income Proof, Bond Certificates
Proprietorships
ID Proof, Address Proof, Signature Proof, Business Registration Proof, Income Tax Returns, Bond Certificates
Partnerships
ID Proof, Address Proof, Signature Proof, Partnership Deed, Registration Certificate, PAN of Firm, Authorization Letter, Bond Certificates
Limited Liability Partnerships (LLPs)
Same as Partnerships
Companies
ID 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
Trusts
Trust Deed, PAN Card of Trust, ID Proof of Trustees, Address Proof of Trustees, Signature Proof of Trustees, Resolution of Trustees, Bond Certificates
The bottom line
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 bond rates of interest 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.
11 March 2024
6 mins read
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