Although cheaper, loans against assets come with conditions

A loan against securities or stocks is a loan given as an overdraft facility, which requires the borrower to pay interest only on the amount drawn. This type of loan is preferable for people looking for short-term liquidity. Since your investments secure the loan, the interest rate is low. The interest rate on a loan against mutual funds, equity shares, and bonds, is usually lower than personal or other unsecured loans, which makes it easy for the borrower to repay the loan.

While taking the loan against stocks, shares, or other financial securities, the borrower is liable to pay the borrowed amount with interest within the given time (tenure), although in monthly EMIs as agreed by the lender and borrower at the time of application. However, if the borrower wishes to pay the loan earlier, s/he is open to pre-close the loan anytime. In such a scenario, some financial institutions, including Abhi Loans, do not charge any prepayment fee, while others may.

A loan against securities can be used by people who want to sell their investments and get cash as soon as possible without waiting for the share price to go up again. This type of loan has a fixed interest rate set by the company when the contract is made. If the share price moves up, the borrower receives more money.

Although a loan against shares or other financial securities is cheaper, it comes with certain conditions. Here are a few you must take into consideration before applying for such a loan.

  • Collateral needed to secure the loan

The risk undertaken by the lender is substantially higher for unsecured loans, such as personal or credit card loans. Therefore the interest rates applied are higher than the secured loans. Before issuing a loan without collateral, the lender thoroughly evaluates the borrower’s income stability and credit score.

Contrary to this, a loan secured by collateral gives the lender an increased degree of security. It makes it easy for borrowers to obtain a loan against securities, but they should own financial instruments, such as equity shares, mutual funds, bonds, etc. With these assets to their name, borrowers can take higher loan amounts at lower interest rates.

  • Not all financial instruments qualify for a loan against securities

Collateral (equity shares, bonds, and mutual funds) help secure a loan so that the lender is safe should you not pay the loan in full. But, there is a list of approved securities one may use as collateral to get a loan against securities.

Personal investments in financial instruments like bonds, insurance policies, stocks, equity shares, and mutual funds can be used as collateral to secure the loan. These forms of collateral ensure that the security portfolio remains under the control of the borrower, and s/he continues to benefit from the yields.

  • What happens if the borrower defaults to pay?

The lender works with the borrower to mitigate the chances of the loan going into default. However, if it happens, the lender may undertake the process of reprocessing and liquidating the assets pledged as collateral to regain its loss.

Generally, the lender might issue a notice or offer a grace period to catch up on the outstanding amount before considering a non-payment or missed EMIs as default. The lender might also choose alternatives like modifying the loan terms or asking the borrower to submit more securities for compensation.

The lender might also choose alternatives like modifying the loan terms or asking the borrower to submit more securities for compensation. If nothing works and the loan is considered a non-performing asset (NPA), which is usually a case of three missed EMI, the lender claims the ownership of the securities pledged as collateral.