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 Excess money can be withdrawn keeping aside certain percentage of margin on market value of collateral you offer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 Now, if you withdraw Rs 75,000 through the overdraft facility, you only have to pay interest on the withdrawn amount instead of the entire Rs 4 lakh.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 258 44 55 and 1800 102 44 55. You can also visit the nearest Bank of Baroda branch where our staff will be glad to assist you.

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Advantages of personal loans to raise funds

There are times in everyone’s life when there is a sudden need for money. The immediate choice is generally to use a credit card or to borrow money from friends or family members.
With net-banking now in place and more lenders chasing fewer borrowers, raising money through other sources is now possible at a faster pace.
Gold loans are normally a preferred and cheaper source of the loan, where banks and gold loan companies process the papers fast to give the borrowers the money he or she needs. However, personal loan are now being offered at a faster speed too. There are lenders who advertise that they will disburse the loan within a day. 
Under such circumstances, it is always better to go in for a personal loan rather than using your credit card to meet any emergency need. Firstly, because the personal loan is far cheaper than any credit card loan and secondly because the personal loan can be of a bigger size than what the credit card can offer.
But before one takes a personal loan it is important to have a good CIBIL score. With a CIBIL score of over 750, a person can be choosey in picking up the personal loan with the lowest interest rates. A person with a lower score may still get a personal loan but the interest rates may be higher.
The biggest advantage of a personal loan from the point of view of the borrower is that it is an unsecured loan. The borrower need not pledge or mortgage any of his assets to raise funds.
For an entrepreneur, a personal loan can act as a stop-gap arrangement till he is able to raise money from other sources to meet his urgent business requirements.
Like any loans, personal loans need to be repaid periodically in equated monthly installments (EMI). These loans can run from a short tenure of one year to a four-years loan. These days there are lenders who offer personal loans for a period of seven years also.
While taking a personal loan is easy, it should be taken only in case of emergency. Personal loans, being unsecured are costly. It would be foolish to buy an asset with a personal loan, especially when there are financial products available these days to buy a mobile or any other household equipment.
One should avoid using personal loans to repay loans that are cheaper in cost. But they can be used to repay higher cost loans like credit card bills or something similar.
If one is using personal loan to meet the operating expenses of the house then he or she is falling in a debt trap. One loan will lead to another and before the person understands it, he would have fallen in a debt trap. Rather than using the personal loan as a saviour to come out of the debt trap the person would have fallen in it using personal loans. Personal loans should be used only for intermittent emergencies.

Applying for an education loan – the procedure you need to follow

We have all heard the age old saying that the path to a great career and successful life is paved through a quality education. Holding a higher education degree opens up many career avenues and helps you secure your financial future. But with the ever-rising cost of college and university fees, students and parents have no choice but to take on an education loan to fund higher studies. Education loans cover a host of expenses related to higher education such as the tuition and examination fees, hostel fees (if applicable) cost of books and apparatus, conveyance charges and so on. Here’s the education loan procedure you need to follow.
Do your research and choose the lender
Before you begin with the loan application procedure, you need to get the admission offer letter from the school you wish to attend, finalise the lender and then visit them online or in person. Let’s say you choose bank of Baroda as your preferred lender.
Fill the loan application form
If you apply for the loan online, you can find the loan application form on the lender’s website. As per the instructions of the Department of Financial Services, Ministry of Finance, Government of India, all education loan applications (including applications received by Bank in physical format) are to be applied through Vidya Lakshmi portal, i.e. https://www.vidyalakshmi.co.in/Students
Appear for the interview round
The procedure to take education loan continues with the interview round. Whether you apply for the loan offline or online, the bank may call you to appear for a personal discussion. The student wishing to study further is considered as the principal loan applicant, which is why he/she must be present for this discussion. The bank generally asks student applicants some basic questions regarding their overall academic performance, the degree they wish to pursue and the school they wish to attend and so on. They also ask questions regarding the possible income that can be generated from their chosen field. Based on the information provided by the applicant, the bank decides whether or not to proceed with the loan.
Provide the documents
The bank also asks you to provide some documents as part of the Bank’s education loan procedure. You need to submit the admission offer letter provided by your chosen university. The bank will also do its due diligence and verify your enrolment.
The bank approves the loan
After verifying your credentials, your student loan may be approved. The student’s one of the parents/guardians are listed as co-borrower or guarantors and the bank also checks the guarantor’s /co-borrower’s credit scores before approving the loan. Additionally, the applicant must also sign a promissory note and other prescribed loan documents, assuring the bank that the loan will be repaid within the stipulated tenure.
Loan disbursal
The last step in the education loan procedure is loan disbursal. After all formalities are completed, the bank disburses the loan amount directly into the bank account of the university the student wishes to attend. Disbursement can be done partially (–semester wise) or fully, at one go.
Keywords used
education loan procedure, education bank loan procedure, procedure to take education loan

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