Summary: Loans against securities can be an excellent option for funding for many businesses. However, there are a few things borrowers must take into consideration before putting in their request.
A loan against security is a secured loan. Here, you pledge collateral to the bank against your loan. While these kinds of loans are not the easiest or fastest to acquire, they have a relatively lower interest rate. Lenders have a list of securities accepted as collateral, and this information is available on their official website.
Some of the leading securities that you can pledge for a loan against securities are:
- Insurance policies
- Loan on mutual fund
When you pledge equities, lenders will usually offer 50%-60% of the value of the securities in the form of the loan amount you can undertake. In addition to this, lenders can ask the borrower to pledge additional securities. This situation arises if the collateral’s value falls during the tenure and the lender incurs a loss.
We will discuss some of the critical things you need to know before availing this loan, below.
Interest Rate of the LAS
The loan against security interest rate is comparatively lower since it involves collateral. An added advantage of a loan against security is that the interest is not levied on the entire value of the securities pledged. It is only applied to the amount you withdraw from your overdraft account. As a borrower, you ensure extensive research before finalising a lender because it is a long-term commitment, and you have a lot at stake.
Tenure and Loan Amount
Every financial institution makes a different call on a borrower’s loan amount and tenure based on their portfolio. Therefore, when you are availing of a loan against security, it is a good idea to seek advice from a financial expert. And then decide what tenure and loan amount you want to go for to maximise the potential of your portfolio.
The primary stakeholder in the procedure of availing of this loan is your securities. Hence, making it essential to ensure they are valuable, both in the current times and in the future. This means that securities need to hold their value to keep up your portfolio’s health and avoid having to compensate later. If the lenders notice a dip in the value of your securities, then they might ask you to pledge more for compensation. Before deciding on what to pledge as collateral, it is in your best interest to assess the portfolio yourself first and then handing it over to a lender.
Although a loan against security calls for very simple document submission, they still play a crucial role in the process. These documents are:
- Income and employment proofs
- KYC documents
- Overdraft account-related documents
- Security-related documents
- Other supporting documents
If you fail to provide lenders with these documents, your loan request will either be rejected or put on hold for a certain period until you can get your documents ready. Such a scenario is far from ideal. A loan rejection, especially one related to a business, can taint your reputation among lenders. Furthermore, it can hinder your ability to extend credit in the future.
Fees and Charges
Loans against security have an added advantage of very low overhead fees and charges. However, they differ from one lender to another. Some financial institutions may charge you a pre-payment fee. Such fees are levied if you repay the loan before it matures via channels apart from your personal funds. You must look at these costs beforehand. Different lenders have separate clauses for them in the fine print of your loan paper. Read them through and through to safeguard your interests in the long haul.
Getting proper capital in desperate times or to fund any activity is essential. A loan against security can be a lifesaver in such times of financial turmoil. Additionally, the low interest rates and longer tenures promise a better loan experience for the borrower. All you need to do is commit to a lender that has all the services you need!