A loan against collateral is cheaper than a loan without collateral. Here’s how you can encash your financial assets or investments without losing your ownership.
When there is any financial difficulty, the first thing that comes to mind is to encash the fixed deposit or other investments. However, there are many other options available. For instance, you can get a loan against your financial assets while still retaining ownership over them.
Sarosh Amaria, managing director of Tata Capital Financial Services Limited, says, “Selling the assets means ceasing asset ownership which may not be the best option when financing is available against such financial assets.”
He adds, “Loans against financial assets provide an opportunity to enjoy the benefits of asset ownership while raising liquidity to meet any immediate needs. These loans provide liquidity and financial assistance on a short- to medium-term basis.”
Here we discuss loans available against various financial assets, such as securities, insurance policies, fixed deposits, and gold.
Loan Against Securities:
The lenders offer loans against securities, including shares, mutual funds, bonds, etc. The banks keep these securities as collateral against the loan. The minimum and maximum loan amount and the charges may vary for lenders.
For example, the State Bank of India's (SBI) minimum loan amount is Rs 25,000, and the maximum is Rs 20 lakh for equity, hybrid, and exchange-traded mutual funds. For debt or fixed maturity plan (FMP) mutual funds, it is up to Rs 5 crore. Axis Bank offers up to 85 per cent of security value for high-value loans.
The interest rate and processing fee could vary from bank to bank. The interest rate for loans against securities is 11.00 per cent, effective February 15, 2023. Axis Bank's interest rate starts from 10.50 per cent for physical loans and 9.99 per cent for online loans, as per its website.
Things To Keep In Mind:
The value of securities may change during the loan period, so the loan-to-value (LTV) in these loans is low, particularly for equity mutual funds. For debt mutual funds, the LTV is usually higher.
Banks may be selective in giving loans and may not offer loans against all mutual fund schemes.
The market volatility may impact collateral value; if it drops, the lender may ask for additional collateral.
Loan Against Insurance Policies:
Life insurance policies offer double benefits as insurance instruments and as an asset to take a loan against it. However, lenders may have some approved insurance company policies against which they offer loans, and not all life insurance policies hold value for loans.
The interest rate and other charges such as processing fee, stamp duty, pledge and de-pledge fee, and maturity payment charges may vary for different lenders. One can avail of this loan as a demand or overdraft facility.
The loan amount against insurance policies depends on the policy's surrender value. For instance, HDFC Bank offers up to 80 per cent of the surrender value, whereas SBI can give up to 85 per cent. In this loan, the policy is assigned in favour of the lender.
Things To Keep In Mind:
In case of loan default, says Rajeev Yadav, MD & CEO, Fincare Small Finance Bank, “Risks involve policy termination due to loan default and accumulation of unpaid interest, affecting the policy's cash value.”
Loan Against Fixed Deposits:
Fixed deposits (FD) are traditionally used for saving, but lenders can offer you a loan against FD if needed. So you may pledge it in favour of the lender to get a loan instead of breaking it prematurely and meeting your financial requirement. Generally, lenders charge 1-2 per cent interest above the FD interest rates.
As interest rates vary, the loan rates also differ from bank to bank. The loan amount could range from 85-95 per cent; for example, ICICI Bank offers 90 per cent in overdraft facility against an FD, Axis Bank provides 85 per cent, and SBI offers 95 per cent of FD value as a loan. The bank already has the FD details, so there is the least paperwork involved.
Yadav says, "Loan or overdraft against fixed deposit often has the quickest disbursal times out of the choices discussed. Since fixed deposits are used as security, lenders can quickly confirm the asset's ownership and value, speeding up the processing."
The overdraft facility cannot be more than the FD tenure, but if the FD is in renewal mode the overdraft facility can be continued.
Loan Against Gold:
Gold is considered a safe asset when the market is volatile. However, you can also use it as collateral to get a loan against it.
The lender takes possession of your gold when you take the loan and return the asset after you fully repay. The interest rate on the loan depends on the borrower’s risk profile and varies for different lenders. The market value and liquidity of your gold assets are the primary factors in determining the loan-to-value (LTV) in gold loans.
The minimum and maximum amounts may differ for different lenders. For example, Punjab National Bank (PNB) offers a gold loan for a minimum of Rs 25,000 and a maximum of Rs 25 lakh, whereas SBI offers a minimum of Rs 20,000 and a maximum of Rs 50 lakh.
The loan charges include processing fees, valuation charges, renewal charges, overdue interest charges, stamp duty, CIBIL report charges, etc. There are three repayment options; regular equated monthly instalments (EMIs), interest and principal payment at maturity, and interest-only payment similar to overdraft.
Many lenders also offer loans against Sovereign Gold Bonds (SGBs). The interest charges for SGB loans also differ for lenders.
P.E Mathai, Chief Executive Officer Muthoottu Mini, says, “The value of gold can fluctuate significantly over time due to various factors such as market conditions, economic trends, and geopolitical events. If the value of the gold used as collateral decreases substantially, there is a risk that the lender may ask for additional collateral or may sell the gold to recover the loan amount if you are unable to repay.”
The loans secured by assets offer flexible repayment option to the borrower and eliminates tax implications or transaction fee related to an asset sale.
Says Yadav, “Choosing a loan against assets can provide an advantage in meeting short-term financial needs while maintaining ownership and potential upside of the assets. It is important to carefully evaluate these risks, considering personal circumstances and market conditions.”