Did you know that you could seek a loan against your investments too? Many borrowers submit their house or other properties as collateral not knowing how their investments are in fixed deposits, stocks, mutual funds and bonds can be pledged against the loan amount. You can pledge these securities, which means that not only do you gain from the returns on your investments but utilize the same to get a quick loan. This way your investments not only work harder for you but also ensure a smart way of continued income.
Loan against stocks
Think of a possibility wherein you are in dire need of ₹10 lakh immediately. Financial prudence does not encourage you to break open the savings that you have accumulated to financially secure your future nor can you break into your emergency fund considering how much you might need the money to meet contingent liabilities. Re-investing your investments, which means putting your investments to work is the best bet for situations like these.
Start by looking at how much worth of stocks you have. Stock is the generic term used for shares. It does not matter if you are earning or not receiving dividends from your stocks. The borrower is concerned if your stocks are worthy enough to be held as collateral to the loan amount. Also, the value of your stocks must be less or equal to the amount of loan sought to ensure a quick loan approval.
Loan against bonds
Bonds come with a promise of fixed interest payments. Apart, some bonds promise very high-interest rates, thus, allowing lenders to consider the same as valuable collateral. Many lenders including banks and non-banking finance companies (NBFCs) approve loans against such securities provided that these bonds are of a recognized entity. The credit risk of the bonds also matters, else the lenders would find it difficult to recover both the loan amount along with its interest. Many corporates issuing bonds suffer losses due to which they find it difficult to meet their obligations. This explains why some lenders are keener to secure government bonds in place of corporate bonds as loan collateral.
Loan against mutual funds
Many people apply for short-term loans to meet their immediate needs. Liquidating investments to meet your imminent need for finance can derail your long-term financial goals. Apart, repaying a loan involves interest payouts too, which means that you lose money from both ends. If your fund requirement is immediate and exceeds far what you may have accumulated in your contingency fund, it might as well be a good idea to put your mutual funds to use by using the same as collateral to secure the loan. These can be equity mutual funds or debt funds or hybrid funds that you may have parked your earnings in. If the interest on the loan amount is much lesser than the earnings from mutual funds, it makes sense to retain these funds so as to keep earning on them, thus, ensuring the fulfilment of your financial goals. However, if your mutual fund (as in debt funds) earns much lesser than the stipulated interest amount on the loan, it is better to redeem the mutual fund than take a loan and incur an unwanted liability.
Loan against fixed deposits
The interest on any kind of loan, be it a home loan, vehicle or personal loan, is always more than the interest earned on fixed deposits. This explains why it is preferred to break into your fixed deposits than take on a new loan. However, if you are unwilling to use your deposits, you can always submit your fixed deposits as collateral to the loan amount.