6 minsSeptember 18th, 2018
Uncertainty is another name for life. There are many ups and down – very much like a rollercoaster.
But in such times, the investments we make stand as the lender of last resort. On a rainy day, when we are in dire need of funds, while a portion of the investments can be encashed, an even better option is to simply take a loan against securities.
Basically, a loan against securities gives you the flexibility to access money when you need it the most, without selling your securities or investments. This way the path to wealth creation and accomplishing financial goals is left uninterrupted.
Loan against securities are in the form of an overdraft extended against a number of securities pledged with the lender/bank, which could be:
- Listed shares (held in demat form)
- Units of mutual funds
- Listed bonds
- Non-Convertible Debentures (NCDs)
- Life insurance policies
Usually, you get access to liquidity upto 85% of the value of the securities; but it varies depending on the type of securities pledged.
Axis Bank, for instance, grants a loan upto 60% of the NAV, in case of equity-oriented mutual funds, and 85% of the NAV, in case of debt-oriented mutual funds. For loan against listed bonds and NCDs, the loan could be upto 70% of the market value
of these securities.
To process loan against securities, banks levy a small processing fee – which in case of Axis Bank is 0.15% of the loan amount or Rs 1000/-, whichever is higher, plus GST.
- How much is the rate of interest?
- The interest rate for loan against securities is comparatively lower to unsecured loans. At Axis Bank, the effective interest rate is in the range of 10.50% to 12.50% p.a.
- Plus, the interest is charged only on the amount utilised –– no EMI or post-dated cheques are required as in the case of other loans.
- How much can be the loan tenure?
- Loan against securities is a secured loan in the form of an overdraft facility, the collateral being the securities. The facility has to be repaid within a fixed period and the tenure is usually twelve months.
- For loan extensions beyond twelve months, the tenure can be renewed at the bank’s discretion. This is subject to renewal charges and after the margin requirements have been reviewed.
- During the loan tenure, you have the flexibility to repay; but, in case of a delay, a penal interest will be levied.
- Are there any prepayment charges for early loan closure?
- No, unlike other loans there are no prepayment charges to close your loan earlier. When you have repaid the loan in full, the bank releases all the securities held.
- How to apply for loan against securities and the process?
- The process to apply is fairly simple. Initially, you can do it online by filling in the requisite details viz. your name, address, email, mobile number, nearest branch, enter the captcha code. and click,SUBMIT.
- Remember you will need to forward a loan application form,
duly filled and signed, along with the following documents:
- Address proof (Aadhaar, Passport, Latest electricity bill, existing house lease agreement, etc.)
- Age proof (viz. Aadhaar, Passport, PAN Card, Driving License, Birth Certificate, etc.)
- Photo identification proof (viz. Aadhaar, Passport, PAN card, Voter Id, Driving License, Employee id, government department id card, etc.)
- Income proof (salary slip, Form 16)
- Income Tax Returns of the last 2 years
- Bank Statement/Pass Book of last 6 months
- Securities you wish to pledge
- Almost anyone can apply for loan against securities: resident individuals, NRIs, HUFs, even corporates can apply for loan against certain securities depending on the type of security. But individuals need to be over 18 years of age.
- The bank will thereafter follow its process and in case you have any query/concerns, the relationship manager shall provide comprehensive information.
- The sanctioning of the loan will be subject to a thorough assessment, as per the extant instructions and credit policy of the bank. The availability of margin and security will not be a substitute for the due diligence process.
- The loan will be disbursed to you on compliance with all the terms & conditions. And once that’s done, the margin requirement will be reviewed regularly by the bank. In case of any volatile fluctuations of market-linked securities,
you are expected to make good the shortfall, if any, failing which the securities could be enforced.
- Do note that unless the loan is repaid in full, you, the borrower cannot sell the securities pledged with the bank.
- Also, no loan against securities can be granted for investment in capital market or for speculation purposes.
- The benefits of taking a loan against securities:
- Useful means of credit
- The application process is fairly simple compared to other loans
- Compared to other types of loan, the approval and disbursement process is quick
- The rate of interest is lower compared to unsecured loans
- Interest is charged only on the amount utilised and for the tenure it is used
- No system of EMIs, you pay at your convenience during the loan tenure
- No charges are levied for prepayments
- Your other investments assigned for other important financial goals are left undisturbed
- The path to wealth creation is uninterrupted
To meet contingency requirements, availing of a loan against securities is worthwhile; but make sure you are repaying diligently in the interest of your long-term financial wellbeing and credit worthiness.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.