In times of emergency and financial crisis, instead of selling and liquidating investments, taking out a securities loan is a better alternative. Having said that, although the securities lending process is not very fast, it does come with a lower interest rate.
Any type of securities can be pledged, such as stocks, equity or debt mutual funds, insurance policies, and bonds to raise money.
Moreover, as the collateral stays with the lender, it can keep growing and at the same time you can also get your loan instead of giving up your investments.
Industry experts say that one can opt for this option instead of liquidating one’s investments. Although the investments remain with the lender, not only do they continue to grow while they are pledged, but also the investor continues to receive dividends, bonuses, etc., during the life of the loan.
Before opting for a loan, however, check with lenders to see if they accept the securities you hold. Most lenders usually have a list of titles available on their websites that they are willing to accept.
For example, a particular bank in the case of life insurance policies, or mutual funds might have a specific list of companies, which it accepts, or might only accept the top 100 companies, in the case of actions.
Also, in the case of stocks, a lender could offer 50 or 60 percent of the value of the securities as a loan, which could increase in the case of debt or bond funds. Some lenders also ask for additional collateral if the value of the securities decreases during the term of the loan.
These LASs are short-term loans, usually for a maximum term of 36 months. With some banks, the borrower can choose a flexible repayment option and can pay interest each month and the principal at the end of the loan term.
There are also various fees associated with a securities loan – for example, in addition to a processing fee, depending on the loan provider, a borrower might be charged stamp duty on the loan agreement, pledge creation fee, etc.
Various banks such as HDFC Bank, ICICI and Yes Bank have offered loans for stocks and mutual funds online, and more have joined since the pandemic. Usually the whole process is completely paperless.
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