How do loan against securities work?
Once you pledge the shares with the bank, the bank issues a current account for management of the loan. Unlike other loans, you are charged an interest only on the amount withdrawn from the account depending on the time span the fund is utilized. Problem is that not all shares and securities qualify for such a loan. Bank selects the securities according to their market value and offer 50 to 70% of the loan amount to the borrower.
A loan taken against securities like shares, can range between Rs. 1 lakh to Rs. 10 crores depending on the bank or financial institution that’s lending. You also have the option to get additional finance by putting up more shares, Mutual Funds or securities as collateral.
If you are planning to take a Loan against Securities, you need to be aware of a few basic points which are listed below:
The loan value goes up to 50% of the market value for Mutual Funds and up to 70% of the Net Asset Value (NAV) of Mutual Funds pledged.
Repayment must be done via monthly instalments and only includes the interest rate. The principal needs to be repaid only at the end of the term.
You also enjoy an overdraft facility on your loan amount at a nominal rate.
You have the flexibility to swap securities depending on the stock market’s performance.
The loan has a one year default tenure, after which it gets extended for another year and you can extend it further as per your requirements.
You can pre-pay your loan amount at any point of time
Banks offer loans against securities at lower interest rates and they come with an economical overdraft facility. They also come with an ATM/debit card, mobile banking and phone banking facility.
In order to apply for a loan against securities, you need to have a good amount of money invested in Mutual Funds, shares, Life Insurance policies or any other form of term deposits. Individuals within the age of 21 to 75 years are eligible to apply for a loan against securities. It requires minimum documentation and is simpler if you have an existing bank account.
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