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Explained: What is loan against securities and should you avail it?

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This type of loan allows borrowers to raise funds against shares, mutual funds, or life insurance policies instantly without selling them.

Explained: What is loan against securities and should you avail it?
Loan against securities is one of the options that provide a high-value loan urgently. This type of loan allows borrowers to raise funds against shares, mutual funds, or life insurance policies instantly without selling them. The most popular term used to describe this type of loan is a "collateral backed loan” or a “secured loan”.
The collateral or security (or guarantee) that the borrower provides has to be some form of genuine asset or physical assets. These forms of guarantees or securities have to be backed by genuine legal papers that the lender can hold on to.
According to Rohit Garg, Co-Founder & CEO, SmartCoin, usually, one can draw up to 50 percent of the value for equity investments, such as shares and equity mutual funds. One can avail credit of up to 80 percent or even 85 percent of the total Net Asset Value (NAV) for fixed income securities and debt mutual funds.
How it benefits lenders?
As per Kunal Varma, CBO and co-founder, MoneyTap, ‘loan against securities’ provides the lender comfort that the money being lent will safely be returned with interest, otherwise, this collateral will compensate for a defaulted loan.
The opposite of this is an unsecured loan, wherein the lender decides to give a loan without taking collateral or security, but instead relies on a more thorough credit evaluation of the borrower’s ability and intent to repay.
Should customers take it?
From a consumer’s perspective, it is always a smart choice to have access to ready credit, such as through an unsecured credit line, suggest experts.
“Users can borrow money from their credit line, as per their need and pay interest only on the amount borrowed. It is an affordable, flexible and convenient way to have access to extra money, because of factors such as restriction-free usage and convenient repayment terms. But if users don't have this readily available, or when all other doors seem to be closed, then a Loan against security is a good option to fall back on,” opines Varma.
When compared to 'loans against property', 'loans against securities' is a better option for those who need a loan urgently.
“It requires minimal documentation like KYC, security’s latest report and the lien document, whereas, for 'loan against property', there is a long list of documents one needs to provide. There is usually no fore-closure charges for 'loans against securities'. On the other hand, banks charges around 2 percent interest on a foreclosure for 'loans against property',” Garg explains.
However, whichever option the consumers choose, they must ensure that they're borrowing money from a genuine, established and reputable institution and not fall for quick-and-easy schemes.
Disclaimer: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.