Q: What are the things I should keep in mind while applying for a loan against securities? – Sumedha
A: A loan can be a secured loan or an unsecured one. Personal loans, loans against credit cards, etc., come under the category of unsecured loans. On the other hand, loans against property, loans against gold, loans against securities (LAS), etc. come under the category of secured loans.
Loan against securities is quite popular among borrowers because of low interest rates and quick loan processing. You can pledge securities like a fixed deposit, insurance policy, mutual fund, shares, etc. to get a loan against them. When in a financial emergency, instead of selling your investments to arrange the fund, you can consider getting a loan against security and repay it through EMIs. However, there are some important points that should be considered while applying for a loan against securities:
- The loan amount may vary depending on the type of pledged security and its value. For example, you can get a loan up to around 90% of the value of your FD, but the loan amount would be around 50% of the value of your shares or mutual fund investments when pledged as collateral.
- You can’t sell or liquidate the pledged security without removing the lien.
- The interest rate may vary depending on the type of underlying security. For example, interest on a loan against an FD is usually 1-2% higher than the interest you are getting on your deposit; whereas, interest on loans against shares/mutual fund is linked to the applicable MCLR rate.
- You need to maintain the Loan-To-Value (LTV) ratio by depositing extra fund with the bank if the value of the underlying security falls.
- If the margin ratio falls significantly on a loan against security, the lender can liquidate the pledge to recover its amount.
Loan against security is a very useful product to arrange the fund by using your idle investments, but it’s also important that you do your due diligence and make informed decisions.
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