Personal loans are often used to cover unexpected shortfalls in funds when we cannot (or don’t want to) turn to family or friends for a soft loan. Unfortunately, most people don’t even consider other options, like loans against assets, shares, or other forms of collateral.
A large number of investors build portfolios that include bonds, deposits, equity shares, and mutual funds. It is difficult for them to decide whether to raise funds or liquidate their investments in the face of an unexpected need. Additionally, they are concerned about rebuilding the asset. It is possible to get a loan against securities (LAS) from a bank or a non-banking finance company.
You should be aware of the following important aspects of loans against securities before making an application:
No restriction on the end-usage of funds
Unless used for speculative purposes, loans against securities do not restrict the end-use of funds. A loan can be used for many things, like paying for your child’s college education, buying a car, or taking care of other short-term cash flow problems. Due to this feature, loans against securities are a good alternative to personal loans and credit card loans.
Offered as an overdraft facility
Loans against securities are usually offered as overdrafts with a credit limit based on the securities that are pledged. The borrower can also take out money up to the approved limit and pay it back as often as they want until the overdraft runs out. Borrowers can take either the entire sanctioned limit or a portion based on their fund needs. The borrower may also draw from the sanctioned limit and repay it as often as they wish until the overdraft expires. The interest component is charged until the borrowed amount is repaid.
The list of approved securities and their LTV ratios can vary.
Many banks and non-bank financial companies have approved lists of mutual fund schemes, bonds, shares, etc. that can be pledged as collateral for loans against securities. In addition, their LTV (loan-to-value) ratios vary according to their asset classes, subject to the regulatory caps on LTV ratios assigned by the RBI. In general, lenders will accept up to 60% of the market value of equity mutual funds as collateral, while the LTV ratio for stocks is 75%.
Lenders may also have different lists of approved securities and different LTV ratios for those securities, depending on how risky each one is. So, make sure that your investments and their LTV ratios are on the list of approved securities.
Periodic revaluation of pledged securities
Due to the volatility of market-linked securities, lenders often revalue securities that have been pledged. During a market correction, it is also possible for lenders to revalue securities from time to time. By either pledging more securities or paying it in cash or check, borrowers would have to make up the difference if steep market corrections led to the total drawn amount exceeding the sanctioned credit limit. Overdrawing the sanctioned amount may result in a fine of 18 percent per year.
Flexible repayment with no prepayment charges
The interest component of a loan against securities must usually be repaid every month since it is an overdraft facility. Borrowers can repay the principal component until the maturity of the overdraft facility, according to their cash flows, without incurring prepayment charges. The absence of an EMI burden, coupled with no prepayment charges, provides borrowers with greater flexibility to manage their debt obligations in accordance with their cash flow. For those facing frequent short-term cash flow mismatches, loans against securities are an excellent credit option.
In assessing a borrower’s creditworthiness, lenders usually take into consideration his or her credit score, especially when there are pledged securities involved. When a borrower defaults or delays paying, lenders have a backup in the form of lower LTV ratios in loans against securities. Lenders can take a relatively relaxed approach to credit scores when evaluating loans secured by securities.
How does the Loan Against Securities Work?
In a loan against shares, your bank account provides an overdraft facility. You will be able to withdraw any funds from the account, and interest will only be charged on the amount borrowed and the length of time it was borrowed.
Let’s say you took a loan of Rs. 1 lakh and drew Rs. 80,000 from the account. Two months later, the borrowed amount was returned. On the borrowed amount of Rs. 80,000, you will only be charged interest for two months.
Additionally, you receive a loan based on the market value of the shares, with a fixed overdraft limit. In order to increase or decrease liquidity in your account, you can always add or remove additional shares.
The Process from Application to Disbursement
Interest-based loans against shares can be applied online and offline, respectively. Lenders will have different eligibility criteria, but most guidelines will remain the same.
The following documents may be required by lenders for loan approval:
- Borrowers who are salaried or self-employed
- Proof of address
- Pan card copy
- Six-month bank statements
- A copy of the previous three months’ salary slips
- Proof of income (copies of the last two years’ ITRs)
- Borrowers who are not individuals
- A photo of your identity
- Passport, electric bill, or other proof of address
- Statements of account
The amount of the loan will be approved by the lender once the documents have been verified. Lenders usually transfer the full amount within two to three days of approval.
You will be provided with a current account with an overdraft facility and a sanctioned limit. Either net banking or ATM facilities are available for raising contingent funds whenever necessary.
A loan against shares provides an alternative to personal loans and other instruments that require collateral for short-term financing. Mortgage your shares to gain immediate access to funds by simply swapping them in your Demat account.
For any amount between Rs 5 lacs and Rs 100 crores, Rurash Financials provides quick and secure financing. During each stage of the application, loan processing, and disbursement, a loan officer will assist you.
Furthermore, Rurash Financials Pvt. Ltd. offers financial solutions to augment investors’ wealth and facilitate building a legacy in addition to providing financial solutions. You can reach out to our relationship manager now or write to us at: [email protected] for any guidance regarding financial instruments.