LIST OF FINANCIAL INSTRUMENTS AGAINST WHICH LOANS CAN BE TAKEN

Introduction

Aiming to get high returns in the future, people make little savings every month so that they can put that money in long-term investment plans. But life can have other plans. Emergencies like an ailment or loss of a job can eat into your savings and also require you to take a loan to meet your financial needs. While a personal loan comes with an unnerving rate of interest, secured loans with collateral involved can get you a better interest rate. But do you know that your investments themselves can be used to take loans when the need arises? Yes, one can take a loan against some financial instruments too.

Advantages of taking loans against financial instruments

  • For starters, taking loans against financial instruments is hassle-free and offers immediate liquidity especially if you have valuable securities to pledge.
  • Such loans charge zero or negligible pre-payment fees and also offer an overdraft facility.
  • One of its biggest benefits is that the interest is only calculated on the amount you use. This means, unlike an EMI-based loan, in loan against shares, the interest is charged on use of the limits sanctioned and for the number of days it is used. Almost all financial institutions have their own list of approved securities against which they lend capital.  

Types of loans

  1. Loan against Securities (LAS):
In loan against equity shares, the amount and tenure of the loan depends entirely on the financial institution but usually it is about 50% of the value of the shares. In this case, since the value of securities depends a lot on rise and fall in share market, one has to stay well-informed and always keep a check on the amount utilized. You would have to de-pledge the securities before you can sell them.
  1. Loan against Property (LAP):
By mortgaging your home or real estate property, one can get a handsome loan amount at a decent rate of interest. Usually, lending institutes sanction a loan of approximately 65% of the value of the property and with quite a long tenure of repayment. Lending institute will take possession of the property in case of defaults. 
  1. Loan against LIC Policy:
If someone has paid the premiums for three years or more, he/she can take a loan against his life insurance policy and can get up to 90% of the surrender value. Defaults may lead to policyholder losing the insurance coverage.
  1. Loan against Gold:
It’s an age-old tradition in India where people have borrowed money keeping their gold jewellery as security. Gold coins or bars are slightly valued more than jewellery and lenders offer 60-80% of the gold’s value as a loan after checking the purity of gold. A loan processing and gold valuation fee are charged from the applicant. The lender keeps custody of gold till the loan is repaid.
 
  1. Loan against Fixed Deposit (FD):
Mainly because money is kept as a guarantee for more money, this type of loan has a higher loan to value (LTV) - almost 90% and offers a better rate of interest compared to other loans against financial instruments. It charges no processing fee but the borrower needs to repay it before the FD matures.

Most of the loan seekers are not aware that loans against securities, including shares, mutual funds, and other financial instruments are also offered with a decent rate of interest. Analysts rate loan against financial instruments highly especially on a short-term basis. With little calculations and eye on the market, one can save a lot from these kinds of loans compared to an unsecured loan.