For urgent needs, instead of going in for the regular personal loans that are easy to avail, you should go for loan against securities as they are competitive in rates as well as provide a better deal in comparison. The loan against securities not only include loan against shares or mutual funds but can also be secured against debt instruments such as fixed deposit or insurance policies you have in your financial portfolio.
Other crucial factors that should decide the mode you take to secure funds
1. Interest rates: This is the most important a factor, as the longer tenure can result in hefty pay outs from you towards interest on the loan. And it is indeed cheaper than the personal loan rates which given the trending higher deposit rates have in line gone higher for some of the banks.
2. Holding period of the security matters: It is important to keep in mind that while you can sell your holdings into equities or mutual funds or you can surrender your insurance policy to meet the financial obligation at hand, the holding period you wish for the security matters. This is because if you have targeted a medium to long tenure for the security, you should not redeem the investment and instead use it as a collateral.
Herein, just by securing loan against security, customer is entitled to other benefits in relation to security such as the bonus, dividend amount etc.
Also, the loan against such securities needs to availed in case of emergencies.
3. Loan value increases against LTV due to price drop of securities should also be factored: This is crucial given the fluctuating value of the value of securities and in a case it goes down in value and the value of loan amount increases in comparison to LTV ration, then in order to get away with the usual case penalty, you need to deposit the balance amount in your loan account.
4. Not all securities are eligible for loans and loan against FD or short saving schemes should be first looked at: In relation to loan against MFs and equities, factors such as market cap, liquidity and valuation of these securities are considered by lending institutions.
Also, for such pledged stocks, you need to properly evaluate the objective for which loan is being taken. In a general case, while taking a loan you need to look at availing a loan at a better rate of interest rate, written proofs of details in respect of the securities that are being pledged. Furthermore, when taking a loan, you need to take into account, the foreclosure charges so that any easy money at your disposal can help you close the account early.