Don’t liquidate your assets, get a Loan Against Securities

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Many people park their money in deposits and securities for investment purpose. And in times of financial emergencies there are only two options available, to borrow funds or liquidate the investments.

While liquidating the assets, it is always a concern whether you can build it again especially if you have been holding long-term investments or if you can get the best price at the moment.

Thus, in an emergency, you can make use of the Loan against securities facility provided by the banks. With this facility you can raise the required money without having to liquidate your assets.

Let’s look at the details of Loan against securities.

What is Loan against securities?

Loan against securities is a facility provided by the banks wherein you can borrow money by pledging your securities or deposits as a collateral. The banks provide a list of securities that can be used as a collateral to raise money.

Usually, a percentage of the value of securities is sanctioned as loan. It ranges between 50% – 90% of the value of securities pledged, depending upon the security type.

The type of securities that are generally accepted by the banks are:

  • Insurance policies
  • Non-convertible debentures
  • NABARD Bonds
  • UTI Bonds
  • Mutual fund units
  • Demat shares
  • National Savings Certificate or KVP, these are accepted in demat form only
  • Bank deposits

These are some of the securities, although there can be more which varies from bank to bank.

The minimum tenor for these kind of loans is usually 1 year, but it can be increased depending upon the type of security and the customer’s requirement.

The rate of interest for Loan against securities is generally in the range of 9%-14%. 

How does Loan against securities work?

When one applies for Loan against securities, the amount of loan to be granted is dependent upon the type of security pledged.

Once the value has been derived and sanctioned, a current account is opened in the name of the applicant.

Usually, the processing charges to avail the loan are in the range of 0.1% to 1%.

The sanctioned loan amount is given as an overdraft facility, which means you can withdraw the desired amount from your account up to the specified limit. You will not be given the entire sanctioned amount all at once. Instead you have the option to withdraw only the amount that you need at the moment.

The repayment is also easier here. There is no fixed EMI. You can repay the loan at your convenience whenever you have the money to payback, by depositing back in the account. Thus, you can use the money and repay at your own terms. Also, unlike other loans, there is no prepayment fee.

It is a simple process and more flexible than other loans.

How is the interest charged on Loan against securities charged?

The interest on Loan against securities is charged only on the withdrawn amount and not on the entire sanctioned amount. The interest is calculated on a daily basis on the outstanding amount.

Particulars Amount
Loan against securities Rs. 12 lakhs
Rate of interest 9%
Amount withdrawn Rs. 500,000
Interest to be paid 500,000*9%*30/365

=3690

The interest on Loan against Securities is lower than personal loan or credit cards and approximately ranges from 9% to 15%.

Let’s take an example to understand it all better,

Say, you have investments in the form of shares worth Rs. 20 lakhs. Due to some financial emergency you need immediate funds and you consider the option of Loan against securities.

Upon approaching the bank, they will tell you the amount of loan they can offer against the securities you have.

Say, they offer 60% of the value of investments. So, you get a credit limit of 20 lakhs x 60% = 12 lakhs at the rate of 9% p.a.

On submission of documents and after payment of processing fee, a current account will be opened in your name with an overdraft limit of Rs. 12 lakhs.

Now, let’s say that your immediate financial need is Rs. 5 lakhs.

So, you withdraw Rs. 5 lakhs from your current account at some time around second week of the month (assuming your loan gets processed in the first week of the month)

In the third week, you get around Rs. 1 lakh from an old debtor and you choose to repay the loan to that extent. So, you go and deposit the Rs. 1 lakh in your current account.

Now, here the interest is calculated on the daily outstanding balance.

Thus, on the Rs. 5 lakhs withdrawn in the second week, you will be charged interest at the rate of 9% for 7 days (assuming you deposited the Rs. 1 lakh after 7 days). So, the interest amounts to 5 lakh x 9% x 7/365 = 1140.

Then, the outstanding balance is Rs 4 lakhs since you have repaid Rs. 1 lakh. So, for the rest of the month, i.e. the remaining 15 days the interest will be calculated on Rs. 4 lakhs, which amounts to, 4 lakh x 9% x 15/365 = 1476.

The total interest at the end of the month is Rs. 1140 + 1476 = 2616.

Therefore, you have to pay an interest only on the amount withdrawn and not the sanctioned amount. And all you have to pay is the interest amount at the end of the month. You can repay principal amount at your convenience without incurring any prepayment charges.

What are the benefits of Loan against securities?

  1. High loan amount

Loan against Securities offers loan amount as high as 10 crores. 

  1. Lower Interest Rates

The interest rates of Loan against securities is lower as compared to Credit Cards or personal loans. It varies from bank to bank and usually ranges between 9% – 15%. For example, Bajaj Finserv offers Loan against Securities with the lowest interest rate of 9% and the highest loan amount of up to 10 crore.

  1. Lower Installment

Loan against securities offers an option of paying only the interest amount as EMI and the principal amount can be paid at the end of the tenor or even earlier, whenever the customer has sufficient funds to pay back the loan amount.

Also, the interest is calculated only on the amount withdrawn and not on the entire approved loan amount.

  1. No Liquidation of securities

With Loan against securities, the returns on investments are not hurt. Therefore, by giving securities as collateral you kind of raise money without any cost. Since, there is a great chance that interest that you are earning from your securities is covering the nominal interest that you are paying for the loan.

  1. No Hidden Cost

There are no hidden charges to get a Loan against Securities. Usually there is an upfront payment, or processing fees, all of which are disclosed at the time of application.

  1. Unrestricted Cash Withdrawal

There is no cash withdrawal restriction in Loan against Securities. One can withdraw as much cash as they need up to the loan limit. You can withdraw the entire loan amount in cash. However, credit cards have a cash withdrawal restriction due to which even at the time of emergency one cannot withdraw cash.

  1. Flexible Repayment

Loan against securities offers the option of flexible repayment as only the interest component has to be paid and, the principal component has flexible repayment option. It can be repaid at any time within the tenor of the loan amount.

Thus, if you need funds and have great investments but don’t want to liquidate it due to the short-term cash crunch then Loan against Securities is a great option. If you wish to apply for one, you can click here.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.