5 Things To Consider Before Availing Loan Against Securities

Are you looking for a secure loan for your business? Consider availing a loan against securities. Currently, Non-banking Financial Institutions (NBFCs) offer loans on insurance schemes, mutual funds, National Saving Certificate Scheme, and various other options. 

Among these, mutual funds are ideal for business loans. These can offer loan values up to 80% in value of the availed scheme, and interest rates in the range of 9% to 12% — moreover, these work like overdraft facilities in your account. So, you can avail large amounts of investments easily during emergencies. 

The following five things are to be considered before applying for a loan against securities.

1. Rate of Interest 

Loan against securities interest rates varies widely depending on the security, your credit history, and financial lenders tend to be more flexible with interest rates on these schemes. Moreover, often, processing fees for regular loans can be as high as 1.25%. Loans on securities like mutual funds start with a rate of interest of 0.25% or a fixed amount. Generally, the rate of interest for securities tends to be lower than personal loans. It is a significant benefit for businesses, as these loans are often the most comfortable to avail of. 

1. No Pre-closure Charges 

One of the most significant disadvantages of personal loans is usually the pre-closure charges. Even if you manage to beat the financial odds, and secure your investment quickly, commercial lenders still charge EMIs for the complete tenure. It is a significant positive of loans against securities. As these are secured loans, you will not have to pay pre-closure charges in most cases. So, you can secure loans up to Rs.20 lakhs or more and pay it back with regular EMIs or as a single-payment without the additional charges.  

2. Loan Amount 

With securities like mutual fund schemes, you can secure substantial loans, around Rs. 1 crore, during emergencies. Among mutual funds, equity scheme will generally obtain more than 50%-60% of their value. On the other hand, debt fund schemes secure far more with typically 70%-80% loan amount. Please keep in mind that the value of your schemes relies on the calculated value of total shares. Or in other words, on its Total Net Asset Value. 

3. Collateral 

With loans on assets, security schemes require you to transfer the authority of assets to financial lenders. It means you will be required to sign a pledge apart from other documents to sign over the ownership of the scheme. However, this does not mean that you will not receive dividends on the schemes. It only means that in the case of defaults, the lender will have the authority to secure their loan without any legal barriers. 

4. Weekly Revaluation of Portfolios 

 As mentioned earlier, loans against securities work similarly to overdrafts in your bank account. It means you can withdraw amounts when you need it, but if you fail to pay it back – it will also attract penalties. These penalties can range from 18% to 24% on the amount withdrawn. Also, if you have pledged an equity scheme for a loan against securities – it will be reviewed regularly. So, depending on the current value of your equity scheme or fund, your credit limit can vary. 

5. Loan Against Security from NBFCs 

The possible list of collaterals for obtaining a loan against securities includes non-convertible debentures, mutual fund units, NABARD bonds, UTI bonds, Demat shares, and mutual fund units. Lenders vary widely in which collateral they choose to accept. Several NBFCs specialize in providing loans against security. If you have an immediate requirement for a loan, consider one against securities from an NBFC as your first preference. 

In conclusion, despite their high-penalties, loans against securities are ideal instruments for financing your capital needs. These loan schemes can transform an idle investment into a promising business opportunity for wise investors.