Everything you need to know about Loan Against Securities

02 May 2022

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Loans can be broadly classified into two forms, secured debt and unsecured debt. Home loans, car/bike loans, and secured lines of credit are all examples of a secured form of debt. This means that to procure such loans, you need to pledge collateral to the lender. Collateral, in simple words, is a valuable item of a certain value that the lender can sell to cover your loan if you fail to make payments. Banks and financial institutions usually accept real estate, gold, and other such assets as forms of collateral. Now, did you know that you can also get a loan against securities?

Let’s find out more about what is loan against securities and how it works.

Loan against securities meaning

When you pledge your mutual fund units, equity investments and other such security investments in the form of collateral to procure a loan, you are said to have taken loan against securities. These loans are usually offered as an overdraft facility in your bank account. This means that by procuring a loan against security, the lender allows you to withdraw more money than what is present in your bank account. Excess money can be withdrawn keeping aside certain percentage of margin on market value of collateral you offer

Furthermore, the lender only charges you interest on the amount of excess money you withdraw from your bank account. The interest levied is always in proportion to the time it takes to repay the debt. This means that the longer you take to repay the loan, the more interest you will end up paying.

Let’s take a look at a quick example to gain a better understanding. Imagine that you have procured a loan of Rs 4 lakh by offering securities worth Rs 5 lakh as collateral. Now, if you withdraw Rs 75,000 through the overdraft facility, you only have to pay interest on the withdrawn amount instead of the entire Rs 4 lakh.

Here, it is important to understand that securities are usually volatile in nature. Due to this, their value can depreciate any time into the future. Hence, while offering loans against securities, the lender not only bears the risk of credit from the debtor but also takes on the market risk associated with the pledged securities. Consequently, loans against securities are only offered to individuals with an excellent credit history. A majority of the lenders require you to have a CIBIL score of above 700 to be eligible to procure loan against securities. To further mitigate the exposure to risk, lenders can sell your pledged securities if you default or if the LTV (Last Traded Value) of the securities falls below a certain threshold that is pre-defined by the lender. The securities sold by the lender cannot be invoked by the debtor even if they repay the debt in full.

Loan against securities benefits

There are a lot of benefits of procuring a loan against securities, such as:

• No restriction on use

Unlike a home loan that you can only use to purchase a property, you can use the money from a loan taken against securities as per your discretion. So, you can take a loan against securities to meet contingencies and personal needs only. This is because when you take a loan against securities, the lenders credit the funds to you upon request. While making a transaction, the funds are transferred from your account to the vendor’s account. So, this type of a loan can be used for almost any expense, from emergency medical bills to funding your child’s education.

• Access to a high loan amount

Well-known loan providers can help you avail funds up to Rs 5 crore by pledging your security investments as collateral. However, the maximum loan amount usually depends on the type of security you wish to pledge. These loan terms do vary from one lender to the other. At Bank of Baroda, we offer a maximum loan amount of Rs 20 lakh for shares, equity mutual funds in Demat form, debentures, and bonds in Demat form. Alternatively, if you pledge debt oriented mutual funds in the unit or Demat form, you can procure a maximum loan of Rs 5 crore. We wish to make this scheme accessible to as many creditworthy debtors as possible. Hence, if equity mutual funds are in demat form maximum loan that can be granted is Rs 20 lakhs and if equity mutual funds are in non demat form maximum loan that can be granted is Rs 10 lakhs.

• Protect your investments

Imagine you invest in the equity market and have accumulated equities worth Rs 5 lakh till date. You estimate these equities to grow your portfolio by about 48% in 20 years. However, a few months after the transaction, you are in urgent requirement of money and need about Rs 4 lakh to tackle the personal emergency. Here, if you do not have any other savings, it makes sense to want to sell your security investments and raise the required funds. However, if you take a loan for the same amount by pledging your securities as collateral, you can avoid selling your investments pre-maturely and still raise the funds that you need to tackle your emergency. Suppose you pay 12% interest on your loan, your total profit potential at the end of 20 years is 36%!

Loan against securities: application process

Customer has to visit bank’s branch and receive complete help with the application process.

Bank of Baroda loan against securities

At Bank of Baroda, we care for our customers and wish to build a working relationship based on trust. We offer loan against securities like shares, bonds, mutual funds, and debentures. We offer high value loans with minimal documentation and attractive interest rates. Loans are available to individual residents & Non-residents. You simply need four documents to proceed – identity proof, address proof, proof of income and security proof. We also accept securities that have joint holders too.

Now, you don’t need to sell your securities to get the funding you need. Let your investments stay on track to reap the rewards you have always dreamt of. Simply get in touch with us today to know how you can apply for this type of loan or to explore our other loan products . We are reachable at 1800 5700 . You can also visit the nearest Bank of Baroda branch where our staff will be glad to assist you.

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    The contents of this article/infographic/picture/video are meant solely for information purposes and do not necessarily reflect the views of Bank of Baroda. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Bank of Baroda and/ or its Affiliates and its subsidiaries make no representation as to the accuracy; completeness or reliability of any information contained herein or otherwise provided and hereby disclaim any liability with regard to the same. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Bank of Baroda or its affiliates to any licensing or registration requirements. Bank of Baroda 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 mentioned. Please consult your financial advisor before making any financial decision.

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