In today’s fast-paced world, where everything is instant and dynamic, cash flow is crucial for businesses and individuals. Having access to cash at the right time can help accommodate expenses, seize investment opportunities, and even fund important life events. However, sometimes there may be a delay in cash inflow, but expenses need to be met promptly. In such circumstances, a loan against securities can come to your aid.
What is a loan against securities?
A loan against securities is a type of loan where you pledge securities (such as shares, mutual funds, bonds, etc.) as collateral to avail of the loan. The loan amount approved is generally a percentage of the market value of the pledged securities. The borrower continues to hold the securities, and the lender has the right to sell the securities and recover the loan in case of default.
How does it work?
To avail a loan against securities, you need to approach a lender who offers this facility, and they will guide you through the application process and eligibility criteria. Once you have submitted all the necessary documents and the lender has verified the securities’ ownership, value, and legal status, they will sanction the loan amount. The rate of interest charged on a loan against securities is generally lower than unsecured loans (such as personal loans) due to the collateral provided. The borrower has the flexibility to use the loan amount for any purpose – business or personal.
Who can avail a loan against securities?
Individuals, Non-individuals such as HUFs, Sole proprietorships, Partnerships, Companies, NGOs, Trusts holding securities are eligible to avail themselves of a loan against securities. The borrower must be the owner of the securities, and the securities should be eligible to be pledged.
What are the advantages of a loan against securities?
A loan against securities has several advantages, such as:
- Quick disbursement: With a loan against securities, you can get access to funds within a few days of completing the documentation and verification process.
- Lower interest rate: The interest rate on a loan against securities is generally lower than the unsecured loans.
- High loan amount: The loan amount sanctioned is generally a percentage of the market value of the pledged securities.
- Longer repayment tenure: The repayment tenure for a loan against securities can extend up to as long as five years, depending on the lender’s policies.
- No end-use restriction: Unlike other loans, the borrower has the flexibility to use the loan amount for any purpose, such as funding a business, paying off debt, or meeting personal expenses.
What are the disadvantages of a loan against securities?
A loan against securities also has its share of disadvantages, such as:
- Risk of losing securities: In case of default, the lender has the right to sell the securities to recover the loan amount. Hence, the borrower should be mindful of their repayment capacity and not delay repayments.
- Fluctuating market value: The market value of securities can fluctuate, which could result in the borrower having to pledge additional securities to meet the loan’s margin requirements.
- Limited loan-to-value ratio: The loan amount sanctioned is generally a percentage of the market value of the pledged securities. Hence, the borrower may not be able to avail a loan amount as much as they had anticipated.
What are the factors to consider while availing a loan against securities?
Before availing a loan against securities, the borrower should consider the following factors:
- Interest rate: The interest rate charged by the lender can vary. Hence, the borrower should compare the loan against shares interest rate charged by various lenders and choose the one that suits them the best.
- Repayment tenure: The repayment tenure can vary depending on the lender’s policies. The borrower should opt for a repayment tenure that suits their repayment capacity.
- Margin requirement: The lender may require the borrower to pledge securities with a certain margin. The borrower should be aware of the margin requirement and keep additional securities ready if required.
- Processing fee: Some lenders may charge a processing fee for availing their loan against securities facility. The borrower should compare the processing fees charged by various lenders and choose the one with the lowest processing fees.
Conclusion
In conclusion, a loan against securities can be an excellent source of funding for businesses or individuals in need of quick funds or cash flow. However, borrowers should be mindful of the risks associated with pledging securities as collateral and ensure timely repayments to avoid losing their securities. Borrowers should also compare the interest rates charged, repayment tenure, margin requirement, and processing fees charged by different lenders and choose the one that suits them the best.
