Well taking a loan, involves a lot of procedures not only from the lenders side but also form the borrowers side as well since the borrower will have to make all sorts of analysis regarding the interest rate, loan amount, EMI calculation etc. But all these will cost you a whole lot of time and might not be a feasible option if you require the loan immediately.
But opting for a loan against securities is a much feasible option because the it just takes a day or two for the transaction to be completed and more important, the interest rates range from 12-15%. These kind of loans are offered by various private banks and PSUs where the loan amount will depend on how strong are your share investments.
The advantages enlisted with such loans are many. They provided the borrower with an overdraft facility on which interest is charged only on the amount used by the borrower. Plus, these loans do not carry any pre payment charges, thus making them a hassle free way of acquiring debt.
Almost all banks have their own list of approved securities against which they lends. The customer can borrow against equity shares, mutual fund units (equity, debt, FMPs), government relief bonds, policies issued by LIC and select private insurance companies, NSC, KVP, UTI Bonds and gold deposit certificates.
“This approved list of securities is updated and reviewed every six months. The margins and limits to be sanctioned to the customers depend upon the internal policies of our bank. These policies are governed by the stipulated RBI guidelines,” says Biju Pillai, business head, loan against shares, personal loan and gold loan, HDFC Bank.
Although the value of the loan amount that can be lent, depends upon the value of securities the borrower holds. However as per RBI guidelines, Rs 20 Lakh is the maximum limit upto which the loan can be granted against shares and equity mutual funds.
But along with advantages, there is a downfall to this as well. If in an even of a market crash, the borrower must pledge additional securities or must be in a position to fund the account in a short period of time. This can be reasonably avoided, if you have borrowed only up to the extent of what you can repay. Although loan against securities is a much more feasible option to those borrowers who require funds in a short period of time, the amount that is being utilized should be checked from time to time.
However, “In case of an upward revision in the portfolio, the bank grants an enhancement of limits subject to certain conditions. You must be able to service the interest on a monthly basis. In case you wish to sell the shares, you would have to ‘de-pledge’ the shares and then sell them. This process usually takes one or two days,” informs Pillai.
So, by spending the loan amount as required, you can fund your need as well as avoid yourself from getting into an expensive debt trap.