The easy availability of personal loans has caught the imagination of most borrowers these days. Banks and financial institutions are processing collateral-free loans at record speed, and catering to a wider customer base. However, you cannot deny the apparent benefits of borrowing, when you opt for a loan against collateral.
The idea behind a loan against collateral is quite simple. Apply for one and pledge an asset that you own as collateral. We will discuss the various physical and paper-based assets that you can pledge as collateral in India. But let us also look at the advantages of exploring the possibility of availing a loan against collateral, whenever you require some cash.
Why go for a loan against collateral?
Firstly, when you attach collateral against the loan, the credit risk of the lender reduces. In the event of default by the borrower, the lender can recover the outstanding amount from the pledged asset. Due to the lower risk, lenders are willing to offer loans against collaterals at a significantly lower rate of interest. So, the first benefit you get is a low-interest cost on your loan.
An unsecured loan is disbursed after assessing your income flow, credit score, and repayment capacity. In a loan against collateral, it is the value of the collateral that decides the loan amount. If you pledge a valuable asset, your approved loan amount automatically increases.
A loan against collateral can also warrant a relaxed repayment term. For instance, a housing loan, which is secured against the purchased property, can be spread across 20 or even 30 years. If offered as an overdraft, interest on the loan against collateral is charged based on utilization rather than disbursal.
What to pledge in a loan against collateral?
Loan against Shares – When you avail of a loan against your Demat shares, your shares are held as collateral by the lender. You can avail of a loan against shares seamlessly by applying to the same institution with whom you have the Demat account. You will continue to receive and retain dividends earned against these shares during the loan period. You will also be eligible for bonuses and right issues. This loan is offered against shares held in the individual borrower’s name. Simple documentation like proof of income, address, and identity is required.
A loan against Mutual funds is similar to overdraft facilities that are available in bank accounts. Most banks and NBFCs offer loans against mutual funds, by holding the mutual fund units as a pledge. Being a secured loan, the interest rate would be comparatively lower, which can be further low if you have a good banking relationship and a high credit score. The lender would generally ask a mutual fund registrar to mark a lien against the mutual fund units offered by you as a pledge. These units will remain irredeemable during the tenure of the loan.
In the case of equity mutual funds, only around 50% of the net asset value is offered as a loan. The lender may also have a specified minimum and maximum limit on the loan against the mutual fund. Once you repay the loan, the lender will intimate the fund house to lift the lien. You can also request a partial lifting of the lien. In case of default, the lender can intimate the fund house to redeem the units and reimburse the lender for the default amount.
Loan against Debt Instruments – Apart from shares and mutual funds, a loan can also be applied against the bonds, debentures, and other debt instruments that you hold. For instance, if you have National Saving Certificates, you can apply for a loan against them. In this case, all you need to do is to pledge the NSCs with the bank by visiting the post office where you bought those NSCs. After you submit the pledged NSCs along with the loan application form and other required documents, your loan against debt instruments will be processed. Many banks categorize them under loan against property and offer an overdraft-like facility as a loan.
Unlike shares and equity mutual funds, debt funds, bonds, debentures, etc. have a higher loan to value ratio. Age limits and limits on loan amounts may be in place, which may vary from lender to lender. For easy processing, instruments held in Demat form are preferable. However, physical assets can also be pledged by following the pledging procedure.
Loan against LIC Policies – A life insurance policy is helpful not only beyond death but also during your lifetime. If you have an urgent cash requirement you can use your policy as a pledge for a loan. Income-generating life insurance policies are generally accepted as collateral for this type of loan. This includes plans like unit-linked policies, whole life plans, endowment plans, and other income plans. You can arrange up to 80% of the surrender value against such policies.
To avail of this loan, you have to fill out the loan application form, along with the original policy papers, and proofs of income, identity, and address. The documentation is further minimal if you apply to the lender with whom you have an active banking or financial relationship. Loans against LIC policies, too, are offered in the form of an overdraft facility. The greatest benefit of this arrangement is that you end up paying interest only on the amount used or withdrawn, rather than the entire loan amount.
Loan against Gold – Gold is a much-desired possession in Indian households and a popular form of investment. The yellow metal comes in handy when you need financial assistance. Pawning gold for money has been in practice since ancient times. In modern-day loans against gold schemes, you can pledge your gold jewelry, coins, billions, or even digitally held gold to avail of a secured loan.
If you have physical gold, you need to carry the same to the lender. The lender assesses the weight and purity of the gold and determines its market value. Up to 80% of the market value may be offered as a loan against gold. After the documents are verified, your gold loan is speedily processed and you end up with the loan cash on the same day. Your credit score and income flow don’t have the same influence on gold loans as it is highly secured loan. Apart from the fast processing, there is no or minimal processing fee and foreclosure charges in gold loans.
Loan against property – If you own any residential, commercial, or industrial land and property, you can pledge the same to get a loan against property. The loan to value ratio differs from lender to lender but can range from 50 to 80% of the property value. A loan against property is an effective way of releasing the dormant worth of your property and utilizing it in productive or important expenditures. Businesses use loans against property to finance their business expansion plans as well.
With the benefit of a low-interest rate and easy availability, loans against collaterals are a recommended mode of arranging money as and when you need it. With timely repayment and utilization, you can leverage the assets you own to finance your present and future financial needs and growth initiatives
