Usually, investments are made with long-term goals in mind; however, financial needs may arise uninvited. Selling your mutual fund investments or shares might be an obvious way to arrange money, but it also means stepping back from an investment long before you plan to. Under such circumstances, a loan against securities provides a great option for financial needs. You can use your eligible investments as collateral and access funds while continuing to own them.

What Is A Loan Against Securities?

A loan against securities is a secured kind of borrowing where borrowers pledge their financial investments to the lenders as collateral. Some of the eligible securities to be pledged for a loan may include mutual fund units, shares, debentures, bonds and other approved investments. The lender keeps the securities as collateral till the time the loan is repaid, while the ownership still remains with the borrower. It means that the borrower can continue to receive benefits from their investments, such as interest or dividends whenever applicable.

For anyone willing to borrow against investment, the amount available depends on multiple factors such as the type and market value of the securities, their volatility and liquidity, and the applicable loan-to-value requirements by the lender. Generally, many lenders maintain an approved list of securities which can be pledged, so not every type of investment or stock may qualify.

Loan Against Security – The Process

The process of loan against security begins with an application to an eligible lender, bank or NBFC. The borrower gives details of the securities they are willing to pledge in addition to the required documents. Then, the lender evaluates the securities and determines the loan amount limit applicable on the basis of the investment’s value and loan-to-value criteria.

Loan against securities may be structured as an overdraft facility instead of a conventional loan where the entire loan amount is disbursed upfront. In such situations, the borrower can withdraw the loan amount when required, as per the approved limit. However, interest is charged on the amount that is withdrawn instead of the entire sanctioned limit.

Remember, the amount you can borrow is not equal to the market value of your investments. Lenders maintain a margin against the collateral as the value of your securities can fluctuate. For instance, a loan against stocks may be available only against securities included on the approved list of the lender. The lender monitors factors such as the market value, volatility and liquidity of your stock before deciding on the loan amount approval.

What Happens After The Loan Repayment?

Once the borrower pays the outstanding loan amount as per the agreement, the lender releases the pledge on the securities. The investments are released from the collateral arrangement. Before applying for such a facility, borrowers should ensure they understand the applicable interest rate, repayment terms, LTV, eligible securities, and the consequences of a fall in their investments' value.

Conclusion

Overall, a loan against securities gives borrowers an easy way to access liquidity from eligible investments without exiting them. In other words, a loan without selling shares can provide access to funds while the pledged investments remain in the borrower's ownership, subject to the terms of the facility. However, the eligible securities, terms and conditions, interest rate and borrowing limit vary from one lender to another and as per the borrower’s circumstances.