A loan against securities allows investors to avail of required funds by leveraging their existing investments in securities. It is an overdraft facility where you will pay interest on the utilized loan amount instead of the approved loan value.
This loan allows the borrower to continue receiving the interest, dividends, bonuses, and other corporate benefits on the pledged securities. It may not be prudent to sell the holdings due to sudden financial emergency unless it makes sense to liquidate the investments. Therefore, it can be considered as an excellent way to meet an investor’s short-term financial requirements without disturbing their long term investments.
Why Loan Against Securities is Considered Underrated?
This loan against securities (LAS) is considered underrated to various myths among investors.
Myth 1: The interest is higher on loans against securities than other types of loans.
Reality 1 – The interest rate is much lower on loans against securities. The first reason is, you are raising funds against a secured loan. The lender has your securities that make it feel safe against default risk. Second, the interest rate depends on the lending institutions you choose. Rurash Financials – A loan aggregator platform gets you the LAS at as low as 7.5% interest rates
Myth 2: Limited scrips are eligible for loans against securities.
Reality 2 – Lenders provide an exhaustive list of approved securities that can be pledged to avail of a loan. The list includes listed equity shares, preferential shares, mutual funds, Employee Stock Options (ESOPs), bonds, Fixed Maturity Plan (FMP), and insurance policies to get quick funds and meet the financial requirements. If your portfolio holds a large chunk of these securities, you can easily get a higher amount. Some institutions do not lend against single types of scrips. You may need to have a diversified portfolio
Myth 3: Loan to value is very low.
Reality 3 – These loans can grant a loan equal to 50-60% market value of securities funds in your demat account. The loan amount ranges between Rs 5 lakhs and can go up to Rs 100 Crores that can easily meet the financial requirement of every business. The LTV (loan to value) ratios may vary based on the asset class of pledged securities and the risk assessment of individual securities. They are subject to the applicable regulatory cap by the RBI (Reserve Bank of India). For example, you can get a loan value of upto 60% of the value of the securities, whereas loan value against certain underlying securities can go up to 75%. Availability of such a quick and vast amount enables a business to grow and meet the working capital requirements.
Myth 4: You will lose on corporate benefits.
Reality 4 – In reality, a loan against securities allows the borrower to continue receiving the interest, dividends, bonuses, and other corporate benefits on the pledged securities.
Myth 5: Restricted end-use of the credit.
Reality 5 – The lending institutions do not impose limitations to use the funds raised from a loan against securities, except for speculative purposes. You can utilize the funds towards financing children’s higher education, purchasing a vehicle, personal requirements, business expansion, contingencies, or any undefined goals. With this feature, it is a good alternative for personal loans.
Attractive Features of Loan Against Securities
Let us explain the prominent features of a loan against securities that every investor should know to go with this loan and let their investments remain undisturbed:
1. Flexible loan without fixed EMIs and prepayment charges
First, a loan against securities is an overdraft facility that allows you to repay the loan in a flexible manner. You need not pay the interest at the used loan value only, unlike other loans where you need to pay the interest on the entire loan value.
Second, you have the option to pay the interest along with the principal or pay the interest only and set off the principal against the pledged securities.
Third, you can adjust the EMIs also. It is not necessary to pay the same EMI in the changing environment where you may have to go through losses in your business.
Fourth, there are no additional charges to make prepayments.
2. Get better ROI on your investments.
An investor creates an investment portfolio with a mix of different securities intended to accomplish short-term and long-term financial goals. In order to generate higher returns with consistent growth over time, it is necessary to keep the investment intact. In case you have liquidate your investment due to a financial emergency. A loan against securities can save your profits. You can simply pledge your investments and let the investments generate returns for you.
3. Quick financing for your urgent needs
Usually, approving a business loan is a long and cumbersome process with lots of paperwork. LAS is an easy-to-process loan. You need not wait for weeks for funds disbursal. A loan against securities brings relief for companies as they need not submit their books of accounts to get a higher amount of loan. Pledge securities of large value, retain the ownership and start receiving the benefits on your pledged securities. Access the funds and quickly execute your business growth plan.
4. Relaxed credit score
A credit score is one primary factor that a lender considers to evaluate the borrower’s creditworthiness. In the case of a loan against securities, lenders can adopt a relaxed approach towards a credit score. The reason is that it is a secured loan with the backup of pledged securities, and the lender need not worry about delayed payment from the borrower.
Thus, with such benefits, a loan against securities is worthy of being utilized by investors instead of facing losses in unsuitable market conditions to exit from investments. Individuals, Corporates, and HUF can utilize these loans. As mentioned above, there are a few lenders offering a lower interest rate. RURASH Financials can help you find such lenders.
Rurash Financials- An aggregator for Fixed Income Products.
RURASH is one of the few investment management firms that understand that senior citizens need to put their investments in safer investment products to generate an alternate source of income for their golden age, thus offering them the best possible fixed-income investment instruments which not only beat the inflation but also generate consistently higher returns.