Investments in financial assets like equity shares, mutual funds, etc., become a source of liquidity in the event of an emergency, such as unforeseen medical requirements and costs.
However, it is not a good idea to sell such assets for long-term financial needs. Instead, you might think about borrowing money against those securities. Let’s get into the specifics of when to apply for these kinds of loans and the associated benefits and drawbacks.
To deal with urgent requirements
Sometimes, we require funds to cover costs associated with major vehicle repairs, medical emergencies, etc. It’s difficult to arrange funds with a short notice. If this were the case, one might consider taking out a loan secured by securities instead of spending all of one’s savings and liquidating one’s assets.
The majority of unsecured loans and credit cards have higher interest rates than loans against securities. This is due to the lower interest rate because borrowers are pledging their shares as collateral.
Lower rate of interest
After the borrowers have deposited their securities, these kinds of loans are typically offered as an overdraft facility in their accounts. The advantage is that you can draw money from the account whenever you need to, and you only have to pay interest on the loan amount and the time you use it.
Bankers calculate the loan value as between 50% and 90% of the underlying collateral value. The amount of the loan for which you are eligible is determined by the value of the securities offered as collateral. A lender might offer 50% for equity shares and 90% for bank deposits, the surrender value of an insurance policy, and other things. This may differ depending on the lender (banks or NFCs) from which you obtain the loan.
Ease of processing
The borower does not need to provide proof of income or credit score in order to obtain a loan against securities. Because it is a secured loan, the banker or lender only considers the kind of financial asset and its value when determining the interest rate, term, and other details.
The process of getting a loan approved is made easier because of this. Additionally, these kinds of loans are paid out within 24 to 48 hours. This will assist you in meeting your cash needs during an emergency.
Portfolio remains unaffected
The portfolio does not change as a result of taking out loans against securities. For instance, if you pledge mutual funds, the number of units invested in the market, the number of equity shares, and all of the benefits of your investments will continue to be available to you. Whether it is a profit from value shares or an interest pay from a bond, the moneylender has no power over these installments.
As long as you don’t miss a payment, you can keep earning money from the investments. To put it another way, even though these loans use your dividends and returns as collateral, you can still use them.
Drawbacks associated
While there are numerous benefits to borrowing against securities, there are also some disadvantages. Most of the time, banks and financial institutions have low loan-to-value ratios, which are not good for investors with low-priced stocks. In addition, the investor will not be able to sell the shares and book profit at the same time.
The lender has the option of lowering the maximum amount that can be borrowed against shares in the event that the portfolio value significantly decreases and requiring the borrower to repay some of the principal.
To put it another way, until the loan is paid back, no one can fully control the portfolio. These kinds of loans are not suitable for home loans, and lenders will not accept the shares of all businesses because they have their own list of shares and will only consider those shares.
In conclusion, investors can maintain their investments by taking out a security-backed loan in an emergency. Taking into account the aforementioned parameters, one ought to examine the circumstance and act accordingly.
