Selling shares or securities is only one way to raise funds to meet unforeseen expenses. A lesser-known way is to take a loan against securities or shares. A loan against securities is a loan advance against a pledge of securities like shares, insurance policies, or mutual fund units.
How does a loan against securities work?
A loan against securities helps individuals raise funds without selling securities from their portfolios in haste. Individuals in need of funds can approach a bank and pledge their securities as collateral for a loan advance. Typically a current account is opened with the bank of choice in the borrower’s name. After the pledged securities are deposited, the loan is extended as an overdraft facility in that account. Naturally, the loan amount is dependent on the pledged securities.
The interest payable on the loan is dependent on the withdrawn money from the account and the period of borrowing. For instance, a borrower has sanctioned a loan against securities worth Rs 5 lakhs. If the borrower withdraws Rs 1 lakh for a period of one month, he is only liable to pay an interest amount for one month on Rs 1 lakh.
What are the eligibility criteria for loans against securities?
- The applicant must be above 21 years of age.
- The borrower must be an Indian resident.
- He must be a salaried employee or self-employed. One can also apply for a loan against securities as an organization, HUF, or as a non-individual entity. The applicant should have a registered business with an existence proof of at least two years.
- The bank must approve the securities for pledging.
- Shares held in the name of minors, HUF, companies, or NRIs are not eligible for pledging.
What are the features of loans against securities?
- Investment assets like mutual fund units, insurance policies, etc., are offered as collateral for LAS.
- The eligible securities that can be pledged differ between lenders. Each lender has a list of eligible securities.
- The loan tenure is usually for one year, which can be extended or renewed.
- Loans against securities do not have a fixed tenure for which the borrowed money should be held. Borrowers can choose to repay whenever possible without any prepayment charges.
- The loan is disbursed in the form of an overdraft facility with the lending bank. The withdrawal limit is dependent on the value of pledged securities. The loan to value ratio varies between securities.
- A borrower can withdraw any amount within the loan limit. The interest payable is determined according to the money withdrawn and the period held.
- Such loans do not have an EMI component.
- Some banks also offer the option of part repayments.
- However, LAS comes with a fixed period within which the principal must be repaid.
- The loan amount sanctioned against mutual funds depends on the value of mutual fund units. Typically, the loan amount limit is up to 50% of the market value and up to 70% of the net asset value of the mutual fund units.
- The loan amount against an insurance policy goes up to 90% of the surrender value of the insurance value. Unit-linked insurance plans and term insurance policies are not eligible for pledging.
- The loan offer against shares is usually 50% of the value of shares pledged. However, the overdraft limit fluctuates with the market conditions. In case of a sharp market correction, a borrower may be asked to increase the value of pledged shares by pledging more shares.
What are the benefits of a loan against securities?
The value of the loan against securities is dependent on the value of pleaded securities. Thus, it allows borrowers to borrow as much as Rs 100 crore as per the pledged portfolio.
A broad list of approved securities
Loans against securities are secured loans against collateral such as mutual funds, insurance policies, bonds, shares, etc.
Useful in meeting urgent fund requirements.
In the event of an urgent requirement of funds, a loan against securities lets individuals raise funds without liquidating their portfolios. Such loans help in raising funds without selling securities. Moreover, The ownership of the securities pledged against the loan remains with the borrower.
Continues investment income
A premature liquidation of an investment portfolio can be a loss-making decision. A loan against security lets an individual meet urgent monetary needs while continuing to earn dividend income or profits. The dividends or gains from the securities are reinvested continuously, and the borrower continues to reap the benefits of portfolio appreciation.
No EMI burden
Since the loan is in the form of an overdraft facility, there is no EMI. The principal is repaid as per the tenure of the overdraft facility with no prepayment charges and a lock-in period. Hence, a loan against securities comes without an EMI or prepayment penalty burden.
Lower interest rates
The interest rates on loans against securities are lower than on unsecured loans. Moreover, the interest is only applicable on the amount utilized and borrowing tenure. Thus, a borrower then reduces the money paid towards interest by repaying as quickly as possible. Flexible repayments are not possible in a conventional bank loan with fixed tenure and prepayment penalties.
Swapping of pledged securities
Individuals can pledge from an extensive list of approved securities and swap the pledged securities with other securities. Suppose the borrower wants to increase the borrowing limit. In that case, he can do so by adding more securities to the already pledged securities.
- Like the conventional loan, a borrower can choose from various lenders to get a loan against securities.
- LAS usually does not involve a restriction of the usage of borrowed funds. Other than for speculation, the money borrowed can be used to meet cash-flow mismatches, education, marriage, purchase of consumer durables like a car, etc.
- The approved loan amount is dependent on the securities. Thus, a borrower with a low credit score but a stellar portfolio can easily take a loan against securities.
Is a loan against securities a better option than unsecured loans?
Unsecured loans are sanctioned without collateral on the basis of the applicant’s credit score. Factors like consistent tax filings, job continuation, etc., also determine the eligibility of an unsecured loan. Because such loans are not backed by any securities, they have a higher interest rate than secured loans like LAS. Moreover, an applicant’s creditworthiness is the most significant determinant of an unsecured loan.
The loan tenure and amount sanctioned are lower in unsecured loans because they depend on monthly income and creditworthiness. Thus, they are a good option if a small amount is required. LAS offers higher loan amounts and flexible tenures. Hence, they are better suited when a higher amount is required for purposes like business expansion or home purchase.
Unsecured loans come with an EMI component paid monthly during the loan tenure. There is no monthly payment requirement in LAS. Borrowers can replay anytime in the tenure with no prepayment charges.
The loan amount is dependent on the value of securities. Thus, the withdrawal limit fluctuates as per the value of shares, mutual fund units, etc. The loan amount in unsecured loans is fixed during the time of sanctioning. There is no scope for increasing the loan amount. WIth LAS, the withdrawal limit can be increased by pledging more securities. If the market conditions cause an increase in the value of your pledged securities, this can also increase the withdrawal limit.
The interest in LAS is only applicable to the money utilized and the period for which it is held. Hence, a borrower can minimize the interest payment by a swift repayment. The interest rate and the total interest payable are usually fixed, and a borrower cannot reduce interest payment by reducing the time the borrowed money is held.
Documents required for loans against securities
For Self-Employed borrowers;
- Photo identity and address proof like Aadhar, driver’s license, or electricity bill.
- Business proof like ITR, company license, or tax registration copy.
- Income proof like ITR.
- Bank statements.
- Investment proof like a shareholding certificate or a holding statement.
For salaried employees;
Along with documents required by self-employed borrowers, salaried employees have to furnish income proof via salary slips or form 16 and job continuity proof like employment or experience certificates.
Where to claim a loan against securities at an affordable interest rate?
There are multiple lenders offering loans against securities with varying features and requirements. A borrowing looking to raise funds via a LAS at the best interest rate is required to compare several lenders. Moreover, the process of LAS can be overwhelming for many.
Rurash finance can make this process seamless and quick with expert knowledge and customer-centric services. A borrower can avail of a swift and secure loan from Rs 5 lakhs to Rs 100 crores with Rurash finance. Borrowers can pledge their securities and access funds at low-interest rates through a hassle-free online application and instant processing.
Rurash’s expert wealth management team, with an extensive experience in financial services, offers customers the best guidance on loans against securities. Customers can rely on Rurash to avail of a loan at the best interest rate per their investment portfolio. The application, pleading of securities, and disbursement of the borrowed amount can be made online with Rurash finance.
Features and benefits of claiming a loan against securities with Rurash finance?
- The pledging of mutual fund units, equity shares, or bonds for a LAS is done through a hassle-free online process.
- The online process will only require customers to furnish their identity and address proof, security proof and holding statement, and bank statements.
- A relationship manager that supports the process from the application to the disbursement of funds is assigned to the borrowing customer.
- The approval process is quick and is typically done within 24 hours of account opening and pledging of securities.
- An overdraft account will be set up in the borrower’s name, allowing him to withdraw and utilize funds within the drawing limit whenever required. The drawing limit is set as per the quantity and quality of the pledged securities.
- A customer can pledge from a wide range of over 800 approved securities. Rurash helps customers borrow funds against mutual funds, sovereign bonds, and many other securities. The pledged securities portfolio is evaluated on a daily basis as per the market rates.
- Customers can apply for a loan amount ranging from Rs 10 lakhs to Rs 100 crores or more with Rurash finance.
- The customer is only required to pay interest on the monthly outstanding loan amount. The interest rate can be as low as 7.5 percent. There is no EMI servicing.
- The customer can choose to foreclose the loan at any time or pay the loan amount in part payments. Rurash does not charge any extra fees for part payments or foreclosure.
- Ownership of the pledged securities remains with the customer. The dividends are continuously reinvested.
- Moreover, a customer can choose to swap or add more securities to the pledged portfolio. The customer can increase the drawing limit on the overdraft facility by adding more securities. This update takes around two days to reflect in the customer’s account.
- Safe and secure transactions right from the application process.
Loans against securities are great options to meet urgent cash requirements without liquidating your investment portfolio. The investments continue to grow while being pledged, and the borrower continues to earn profits and dividend income. Hence, raising funds through LAS is better than selling your assets hastily or at a loss. Such loans are better than the usual bank loans as they come with flexibility in repayments and no EMI burden. Rurash finance can help you with the best guidance on loans against securities and customize solutions as per your requirements and investment portfolio. You can be sure to get a loan at the best interest rate against the pledging of your securities with Rurash. Moreover, the hassle-free and secure online process makes borrowing through the LAS route convenient and easy.
RURASH is one of India’s investment management firms, providing financial solutions to augment the client’s wealth and facilitate building a legacy.