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Financial instruments that can be used as collateral for a loan against assets

by Muzamil Niazi

A loan against assets, also known as a loan against securities, is a secured loan where you can pledge your assets as collateral to a lending institution to raise quick funds. Under this loan segment, you can access a high loan amount at lower interest rates. Apart from real estate properties and gold, you may submit equity shares, stocks, mutual funds, fixed maturity plans, and bonds as collateral to get a loan against securities.

The interest rate may, however, vary from lender to lender, depending on the EMI plan you choose. The loan amount to be availed of can be 50-75% of the value of the assets in your portfolio. If, for example, you wish to submit your mutual funds as security, you may obtain 65% to 75% of your MF units.

If you are an active investor in the stock market and need urgent cash to meet your short-term financial emergencies, taking a loan against stocks could be wiser than liquidating them. That is so because loans against stocks work as an overdraft facility, which allows the borrower to pay interest only on the used amount. Another factor that makes many go for such a loan in times of emergency is that it retains their stock ownership and keeps their growth prospects intact. Here is the list of approved financial securities you can use as collateral.

  • Mutual funds as collateral

Mutual funds are amongst other approved securities you use as collateral to raise a high loan amount. If you have MF units to your name, you may pledge them to access quick capital and meet your cash shortfall. Even if you submit your mutual funds, your investments remain linked to the market. Since they stay invested, you continue to earn returns on them. MF units may give you considerable loan amounts.

If Abhi Loans is where you get your loan from, you can get up to Rs. 1,00,00,000 against your MF units. While the loan amount for equity mutual funds is 65% of their value, you may get 75% of the value of debt mutual funds.

  • Equity shares as collateral

Other financial instruments that you can submit as collateral are equity shares. Banks and NBFCs also accept shares as security against the loan they offer. This type of loan is known as a loan against shares. It is a short-term loan availed for 12 months. However, the tenure is renewable. Equity shares could get the borrowers 50-60% of their current market value. The interest rate again depends on the EMI plan when you choose to take a loan against shares.

  • Life insurance policies

Other than stock market investments, you may also pledge your insurance policies to get urgent cash. When used as collateral for a loan against securities, life insurance policies will get you up to 80% of their surrender value.

  • Bonds as collateral

A bond is a fixed-income instrument, against which a borrower can get a loan. Many banks and NBFCs offer loans against bonds if these bonds are recognized entities. So, when you undergo a financial crisis and need urgent cash, your bonds, including NABARD and UTI bonds, may come to your rescue. Yet again, the loan amount offered on these securities is high. Against these financial instruments, you can get up to 60% of the value of the bond.

No matter what financial instruments you pledge as collateral, a loan against securities is an overdraft facility that requires you to pay interest only on the amount you withdraw. Some financial institutions, including Abhi Loans, also offer a term loan facility. Another good thing about a loan against security is that it facilitates you to pay at will with zero foreclosure charges. However, not all banks/NBFCs offer this facility. You will have to pay a bare minimum processing fee, which could differ from company to company.

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