Know the types of loan against security before you go for it

by Finway FSC Empowering People Financially

In the investment journey of an individual, it is always suggested that pledging shares is always a good option in times when you need funds. The best thing about it is its cheap prices, even cheaper than a personal loan. A data by RBI showed that advances against FDs had seen year-on-year growth of 12.8%, while loans against shares and bonds had grown by 10.6%.

Why loan against security is beneficial?

For a customer, the choice of loan depends on the predicted holding period of the security. If customers wish to hold securities for the medium term, then instead of going for a sale of those securities, they should apply for a loan against securities. Holding such securities also gives you other benefits such as dividends, bonus, among others.

Pledging security also enables you to quickly get steady cash. However, it is also advised to avail this loan only in the times of emergency. Another piece of advice never utilizes this loan for trading purposes.

Understand, before you apply

Your creditworthiness and security kept as collateral will decide the loan amount and interest rate. Here are some features that one must know:

• There is an eligible list of securities on the basis of which you can get such loans. This way, you can invest in equities as well as raise a loan during emergencies. The maximum you can raise is up to 50 per cent of the value of shares pledged.

• You can also take loans on the basis of the value of the mutual funds you hold. In this case, the loan offer goes up to 50 per cent of the market value of MFs and 70 per cent of its net asset value.

• Loan against insurance is allowed only against traditional life insurance policies. Uni-linked Insurance Plans or term insurance policies are not eligible for this. Here, the loan amount ranges from 60 per cent to 90 per cent of the surrender value of your insurance policy. For applying for such loans, purchase of insurance policy at least 3 years prior to the loan application is mandatory.

• Loan against FDs are secured instruments, hence banks lend as much as 80-95 per cent of the FD amount as loan. The rates are 1-2 per cent over and above the FD rates. There are no processing charges levied on such loans.

For your safety, you must make sure that you get maximum LTV, lowest rate of interest and written proofs of all the important documents related to your assets provided as securities for the loan. Know the exit clause and take loans, which can be easily closed with no foreclosure charges.