The New Way To Borrow Money
When faced with a financial emergency, we usually think of either liquidating our investments or availing of a loan or both. However, liquidating your securities is not advisable, especially in a current market scenario where the bull market seems intact. This will impede the wealth creation process and upset the financial plan to accomplish your envisioned financial goals.
Speaking of loans, generally, we think of traditional loans — where you pledge your assets, like property, gold, etc., as collateral to avail the loan — and the disbursal process is typically time-consuming. The next best option that you zero in on is a personal loan, an unsecured loan offered without any collateral. But the higher interest rate usually charged on a personal loan often becomes burdensome. Plus, due to the increased defaults in repayments of personal loans during the COVID-19 pandemic, lenders have tightened the sanctioning of unsecured loans.
So, is there a better way to get funds for your short-term financial needs?
Loan Against Securities is a less discovered yet innovative method to assist you in an exigency and short-term financial requirements. By availing a Loan Against Securities, you can borrow money by pledging your financial investments such as mutual funds, shares, and your insurance policy.
The rate of interest on Loan Against Securities (LAS) is lower (than on a personal loan) because the loan is backed up by the securities you have pledged. The financial instrument against which the loan is sanctioned acts as collateral. In case you fail to make timely repayments, the loan outstanding accumulates, and there is a default, the lender holds the right to liquidate your securities pledged.
It is essential to take necessary precautions when availing of a Loan Against Securities, as making a hasty decision or being irregular in the loan repayment could result in losing the financial investments you have pledged.
These are the things to take care of when availing of a Loan Against Securities:
1. Know the purpose
It is important to have clarity about the purpose for which you wish to avail of a Loan Against Securities. This will help you assess whether the requirement is really worth funding for with a loan that carries 10%-12% interest or can it be postponed until you have sufficiently saved up for it. To avail of a Loan Against Securities because a bank or Non-Banking Financial Company (NBFC) makes a tempting offer would be imprudent.
What can you do
Although attractive offers such as, an instant loan, lower interest rate, digital sanctioning, are difficult to resist, you must check if they really align with your requirements or financial goals.
2. Avoid risking the loan amount
Just because the Indian equity market is at a high, and expected to scale up further supported by favorable undercurrents; do not make the mistake of availing a Loan Against Securities to reinvest it in the equity market. This practice is considered highly risky as there is a chance that the equity market may not move in the same direction and pace as you had expected. You could incur losses if the market corrects. Besides, it does not make sense to invest the loan amount into a start-up, unlisted equities, or for a business expansion where the risk is very high.
What can you do
It is advisable to avoid risking your loan amount on a risky proposition. Ideally, utilize it only in an emergency.
3. Short-term requirement
The Loan Against Securities is one of the best options available for a short duration of several months, especially when you borrow against shares and equity-based mutual funds. The lenders do the periodic assessment of your investments, and if the value of your pledged investment reduces more than the due amount, the difference or margin needs to be repaid within 2–3 working days after the lender notifies you. Thus, when the markets are expected to correct or in the middle of a bear phase, avoid availing of a fresh Loan Against Securities.
What can you do
You may avail of Loan Against Shares or Loan Against Mutual Funds (equity-based) only when you require funds for a short duration and that you will be able to repay it in the best possible time (within a few months).
4. Financial discipline
Since the lender holds the right to liquidate your asset to recover the dues, you risk losing your pledged asset/s when you do not make the timely repayments and/or default the loan. Moreover, it will reduce your credit score.
What can you do
Therefore, avail of the loan only for the amount you require (don’t stretch beyond your means) and ensure you have the financial discipline when it comes to repayment. Keep in mind, your financial discipline will determine your financial wellbeing and success.
5. Do your research
While a number of banks and NBFCs are offering Loan Against Securities, carry out thorough research to make the best choice when availing a Loan Against Securities. The product features and offerings differ from lender to lender. Some lenders may charge a lower interest rate, while others might offer a discount in processing fees or flexible loan repayment.
What can you do
It is advisable to check and compare the products of different lenders and choose the lender who offers the best value based on your requirements. For example, the banks usually offer a lower rate of interest compared to the NBFCs. But you can obtain the maximum loan amount through an NBFC, as most banks have a cap on the maximum loan amount they offer as Loan Against Securities, which might not be sufficient to meet your needs.
6. Analyze your portfolio
Most banks and NBFCs offer Loan Against Securities only on pre-approved shares and mutual fund schemes, and whole life insurance policies. This ensures that the lender stays safe during the market dips. So, do not assume that you will receive the funds against all your investments.
Moreover, it is essential to know that there is a margin on Loan Against Securities as below:
Loan Against Life Insurance Policy — You may get a loan up to 70% to 90% of the surrender value of the insurance policy.
Loan Against Mutual Funds — You may get up to 50% of the Net Asset Value (NAV) on equity-based mutual funds and up to 80% of the NAV on debt-oriented mutual funds.
Loan Against Shares — You may get up to 50% of the current market value of the shares.
What can you do
Check the list of pre-approved securities on the lender’s official website. The list usually has top 50–100 shares and mutual funds. No lender offers a loan against penny stocks. Plus, you need to bear in mind the margin requirement when availing of a Loan Against Securities.
7. Ensure you are eligible
As Loan Against Securities is a secured loan, there are no stringent eligibility criteria for the borrower. That said, the basic requirements vary from lender to lender. The general conditions are:
- You are an Indian resident
- You are between the age of 21 years to 65 years
- You have a regular and proven source of income
- You hold worthy financial instruments accepted by the lender for a Loan Against Securities
What can you do
Always check your eligibility with the lender before applying for a Loan Against Securities.
8. Approval/Rejection of the application
Once you have submitted the required documents, the lender verifies your application and documents. They also perform a soft credit check to assess your creditworthiness. In addition, the securities you wish to pledge are also assessed, and the valuation is done. Finally, if you meet all the requirements, the lender approves your loan application. It does not take a long time for the lender to decide on approval/rejection after you apply for a Loan Against Securities.
What can you do
If you have not received any intimation within the prescribed time by the lender, make sure you follow up with them and check if any required steps are pending from your side.
To conclude
A Loan Against Securities can be the best choice if you take care of the points mentioned above. It is advisable to avail of a Loan Against Securities when you are in urgent need of money for a short duration and have the capacity to repay it on time.
Also, choose a lender that offers the best value after you have compared the offerings of different lenders.
DhanLap powered by Ark Neo Finance offers Loan Against Mutual Funds, Loan Against Shares, and Loan Against Life Insurance Policy at a competitive rate of interest. Moreover, you can apply for the loan from the comfort of your home as the application process is completely online, which makes it even easier and quicker. You can get the Loan Against Securities within 15 minutes by following these simple steps:
- Visit the official website www.dhanlap.com
- Sign-up by verifying your mobile number and email address.
- Share your personal details, such as name, age, address, contact details, details of identity and address proofs, etc.
- Read the list of securities accepted as collateral.
- Select the securities which you wish to pledge.
- Read all the Terms and Conditions and pledge the securities digitally.
- You will receive a ready-to-use loan amount.
This article has been authored by PersonalFN — a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinions on investing.
