Loan against Securities

Moving ahead with our series of assets utilization for short term goals, we now move across to discuss the next set of bigger chunk of our net worth. i.e. Our Investment Assets. 

 

What is loan against Securities?

Loan against securities is basically an overdraft facility made available against pledging of your securities with a financial institution for a certain amount against the market value of the security. The various instruments that are generally included under this are:

• Demat shares
• Mutual Fund units
• Fixed Maturity plans (FMP)
• Exchange Traded Funds (ETF)
• Insurance Policies
• Savings Bonds

Who is eligible for this loan?

As per the individual products, the eligibility is determined. Generally, an individual between the age of 21 to 70 is given this loan. It may differ as per different bank wise. Also, there are sub conditions for eligibility in the products discussed above. However, there is an approved list of securities published by every lender to determine to certify the loan. Also, in certain cases HUF, or companies, patnerships or sole proprietorship are not allowed to secure these loans.

How much can one borrow against securities?

Usually almost 50% of the total market value is made available as an overdraft against securities. This amount is also reviewed from time to time (sometimes as frequent as weekly) to match the fluctuating market value. The overdraft facility is an annual contract renewable every year in line with change in approved list of securities.

What are charges or how do I repay the loan?

Beyond the processing charges, the bank charges you interest on amount withdrawn by you and for the period for which it is utilized.It is usually charged on monthly basis in your account. This makes it flexible to ensure that you don't have a fixed cost attached every month and our paying only for your expenses.

So, Loan against security is helpful in case of some short term fund requirement although, it is not recommended to be utilized for some unrequired expenditure but used for asset building.