How to Use Stocks and Bonds as Collateral for a Loan?

909 Views Updated: 29 Sep 2018
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Using stocks and bonds as collateral is an excellent way avail financial assistance without liquidating your fixed assets. Accordingly, a loan against stocks allows you to borrow funds against your securities without actually liquidating your investments.

Banks and NBFCs offer loan against Mutual Funds, shares, FMPs, Stocks, Bonds, ESOPs, etc. NBFCS like Bajaj Finserv provide loan against securities up to Rs. 10 Crores at one of the most profitable interest rates. If you have a strong investment portfolio,  it can be extremely beneficial in such situations. Apart from building wealth, you can lend them as collateral to the lending institution without stopping to invest in them.

You don’t always need a large amount in emergencies. Hence, you don’t have to avail loans against pledging all of your securities. Depending on the amount you need, the capability to repay and liquidity of shares/debentures – you can guarantee only some of them. Having said that, all securities are not eligible to be pledged for a loan against stocks & bonds. Lenders have a definite list of ‘mortgageable securities’, and hence, it is essential that you check the list before applying for the credit scheme.  

Different Options That Can Be Used as Collateral

Here’s a lowdown on the different options that you can use as a collateral when availing your loans. 

Property Deeds

Property Deeds are probably the most widespread source which can be lent as collateral to an institution. It doesn’t matter if it is a residential or commercial property. The loan can be availed by the person who holds the deed. However, if there are two applicants for availing a loan, one of them must be co-holder of the deed. You can use these deeds when you need more substantial amounts in crucial events of life like higher education, expanding the business, etc. Since these are secured loans, you can get lower interest rates as compared to other types of loans.

However, in case of failure to repay the loan on time, the lender has the rights to take possession of the property which has been pledged through deed. If the amount you owe is lesser than the property value, you can get legal benefit through a lawyer or an advisor too.

Government Bonds

Portfolios contain many investment instruments like bonds, mutual funds, deposits, shares, and debentures. Some of them are Government Bonds like NABARD, NSC and Gold Bonds. You can pledge these bonds to your lender to keep them as collateral while applying for a loan against shares. You can secure your loan through these bonds even if they have slightly lower liquidity than others. However, these bonds are extremely reliable because they are issued by the Government. Among all others, Government Bonds have higher creditworthiness.

Insurance Policy

You can also lend your Life Insurance Plan to the lending institution to be kept as collateral for your loan. However, only some insurance plans can be pledged. Unit-Linked and term insurance plans cannot be guaranteed to a lending institution, as per the guidelines of IRDA. Hence, non-term insurance policies, endowment plans, and money-back policies which are traditional ones – can be pledged to the lenders. In simple terms, the policies which have a surrender value are eligible to be pledged. Surrender value is defined as the policy value when you foreclose it. Also, you can pledge these policies only after you have paid premiums for at least three years. So, if you have recently purchased a plan you are not eligible for a loan against it. 

You can also avail a loan against equity shares. Banks and NBFCs can provide you with a loan against it, which would be kept as collateral. The interest rate on loans against equity shares is much lesser than other traditional loans. 

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