We all have financial goals and aspirations, but sometimes we need a little help to achieve them. This is where loans come in, providing us with the funds we need to invest, expand our businesses, or pursue our dreams. However, not all loans are created equal, and finding the right financing option can be a challenge.
If you are someone who is looking for a loan but is hesitant to take on debt or has concerns about your credit score, a loan against securities could be the solution you have been searching for. This unique financing option allows you to borrow funds by using your securities as collateral, providing a level of security for both the borrower and the lender.
Loans against securities are often referred to as “overdraft loans”. When you take out a loan against your securities, you are essentially setting up a line of credit that you can draw from as needed, similar to an overdraft on your bank account.
Just like an overdraft, you only pay interest on the amount you use, rather than the entire loan amount. This means you can borrow funds as needed and only pay interest on the amount you use, rather than being charged interest on the full loan amount from day one. This can make loans against securities a more cost-effective financing option, particularly for those who may not need to borrow the full loan amount upfront.
Additionally, just like an overdraft, loans against securities allow you to access funds quickly and conveniently. Rather than having to go through a lengthy application process and wait for approval, you can access funds by simply pledging your securities as collateral. This can be particularly beneficial for those who need quick access to funds or who may not have a strong credit history.
Loans against securities can be taken against a variety of securities including stocks, mutual funds, fixed deposits, and insurance policies.
Now, if you are an active trader or long-term investor, you can consider taking a loan against your shares. Shares of publicly traded companies are a popular form of collateral for loans against securities. Loan against shares is one of the most common types of loans against securities.
The loan amount that can be availed against shares varies depending on the value and liquidity of the shares. Generally, lenders will allow borrowers to take a loan of up to 50-70% of the value of the shares pledged as collateral. For example, if you pledge shares worth Rs. 1 lakh, you can typically avail of a loan of up to Rs. 50,000 to Rs. 70,000.
The most significant benefit of loans against securities is that they can act as a source of liquidity for investors. For those who hold shares of publicly traded companies, taking out a loan against those shares can provide immediate cash without having to sell the shares and incur potential capital gains taxes. This can be particularly helpful for active traders who need quick access to cash for market opportunities, or long-term investors who want to hold onto their shares but need some financial flexibility.
But, while they can be a useful financial tool, they also come with risks and potential drawbacks that should not be ignored. Let’s see what are the Pros and Cons of taking a loan against shares.
- Quick disbursal: The process of availing a loan against shares is quick and hassle-free. Since the shares act as collateral for the loan, the approval process is faster, and the disbursal is quicker than unsecured loans. This is especially beneficial for those who need funds urgently.
- Low-interest rates: A loan against shares usually has lower interest rates compared to unsecured loans, since the lender has the security of the collateral. This can help you save on interest costs and make your repayments more affordable.
- No prepayment charges: Most lenders do not charge prepayment penalties on loans against shares, allowing you to pay off your loan early if you have the funds. This means that you can save on interest charges and close your loan account earlier than expected without any additional charges.
- Flexibility: As mentioned earlier, a loan against shares acts as an overdraft loan, allowing you to withdraw funds as and when you need them. This allows the borrower to use the funds for various purposes, including investments and business expansions.
- Limited loan-to-value ratio: Lenders typically only offer loans up to a certain percentage of the value of the shares used as collateral.
- Market volatility: If the value of the shares used as collateral declines, the lender may require additional collateral or demand repayment of the loan.
- Interest rates and fees: While interest rates are typically lower than unsecured loans, borrowers should still be aware of any fees associated with the loan.
However, with Rurash Financials, one can avail of secured financing ranging from 10 lacs to 100 crores, along with interest rates as low as 9% and no prepayment penalties.