How does borrowing against your own money work
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When you borrow against your own money, you put your current financial assets up for loan security. Getting money in this manner can be effective without having to sell your investments. Securities such as bonds, shares, mutual funds, and sovereign gold bonds are the most often used types of securities for these kinds of loans. Here's an in-depth detail of how this process works, focusing on loans against securities.
Understanding Loans Against Securities
To obtain a loan, you must pledge your assets to a lender when you borrow against securities. The loan-to-value (LTV) ratio, which expresses the loan amount as a percentage of the value of the pledged assets, is commonly used. In case you don't repay the loan, ประกัน the lender has the right to sell the securities.
Loan Against Mutual Funds
How It Works
An investor may pledge their mutual fund units as security for a debt that they are securing. These units can be from equity funds, debt funds, or hybrid funds. The process involves the following steps:
Application: You apply for a loan with a bank or financial institution that offers this service.
Pledging Units: You pledge your mutual fund units, which are then marked as a lien by the fund house.
Loan Disbursement: Based on the value of your pledged units and the LTV ratio, the lender disburses the loan amount.
Benefits
Quick Access to Funds: This type of loan provides quick access to liquidity without having to sell your mutual fund units.
Retain Investment Growth: Your investments continue to grow, and you benefit from any appreciation in their value.
Flexible Repayment: These loans usually come with flexible repayment options, allowing you to repay the principal and interest at your convenience.
Lower Interest Rates: When compared to unsecured loans, interest rates on loans secured by mutual funds are frequently lower.
Considerations
LTV Ratio: The LTV ratio is generally around 50-70% for equity mutual funds and 60-80% for debt mutual funds.
Market Risk: Since mutual fund values can fluctuate, a significant drop in value may require you to provide additional collateral or repay a portion of the loan.
Credit Score: The process of getting a loan approved and the interest rate that is given could still be affected by your credit score.
Loan Against Shares
How It Works
A loan against shares operates similarly to a loan against mutual funds. You pledge your shares as collateral, and the lender marks a lien on these shares. The LTV ratio for shares is typically lower than that for mutual funds due to the higher volatility of individual stocks.
Benefits
Maintain Ownership: You retain ownership and voting rights of the shares.
Capital Appreciation: Any capital appreciation of the shares benefits you, despite the pledge.
Convenience: It is a convenient way to access funds without selling your shares.
Considerations
Volatility: Shares are more volatile than mutual funds, which can impact the LTV ratio and require more frequent monitoring.
LTV Ratio: The LTV ratio for shares is usually around 50%.
Loan Against Bonds
How It Works
Bonds, particularly government bonds, are considered safer collateral due to their lower volatility and steady returns. The process involves pledging your bonds, and the lender assesses their value and disburses the loan amount accordingly.
Benefits
Stable Collateral: Bonds provide stable collateral, reducing the risk for both borrower and lender.
Predictable Returns: The steady returns from bonds can make it easier to manage loan repayments.
Considerations
LTV Ratio: Bonds have an LTV ratio that is commonly higher, between 70 and 80%.
Interest Rates: The interest rates on loans against bonds are typically lower due to the lower risk involved.
Loan Against Sovereign Gold Bonds
How It Works
Government-issued bonds backed by gold are known as Sovereign Gold Bonds (SGBs). Pledging SGBs can be a good option for securing a loan due to their high stability and government backing.
Benefits
Government Backing: The backing by the government provides high security for the loan.
Gold Appreciation: You benefit from any appreciation in the value of gold, in addition to the fixed interest offered by SGBs.
Considerations
LTV Ratio: The LTV ratio for SGBs is usually around 75%.
Interest Rates: Interest rates on loans secured by securities are often lower than those on credit cards and personal loans.
Common Features and Benefits of Loans Against Securities
Lower Interest Rates: Interest rates on loans secured by securities are often lower than those on credit cards and personal loans.
Retention of Assets: You do not need to sell your investments, allowing them to grow and potentially appreciate.
Quick Processing: The loan approval and disbursement process is usually faster compared to other loan types.
Flexible Tenure: These loans offer flexible repayment tenures, often ranging from a few months to several years.
Risks and Considerations
Market Fluctuations: The value of the pledged securities can fluctuate, affecting the LTV ratio and potentially leading to margin calls.
Loan Default: The lender may liquidate the stocks you have pledged as collateral to recoup the unpaid balance if you don't repay the loan.
Interest Rate Risk: While the interest rates are generally lower, they can still vary based on market conditions and the lender's policies.
Conclusion
Borrowing against your own money by pledging securities like mutual funds, shares, bonds, and sovereign gold bonds is an effective way to access funds without liquidating your investments. It offers several advantages, including lower interest rates, quick access to liquidity, and the ability to retain ownership of your investments.
However, it is important to consider the associated risks, such as market fluctuations and potential loan defaults. By understanding the nuances of each type of loan against securities, you can make an informed decision that aligns with your financial goals and risk tolerance.
sanju is a seasoned finance writer with over 4 years of experience in the industry. Holding a degree in finance. He has a deep understanding of financial markets, investment strategies, and personal finance, like loan against mutual funds, shares, bonds.
Understanding Loans Against Securities
To obtain a loan, you must pledge your assets to a lender when you borrow against securities. The loan-to-value (LTV) ratio, which expresses the loan amount as a percentage of the value of the pledged assets, is commonly used. In case you don't repay the loan, ประกัน the lender has the right to sell the securities.
Loan Against Mutual Funds
How It Works
An investor may pledge their mutual fund units as security for a debt that they are securing. These units can be from equity funds, debt funds, or hybrid funds. The process involves the following steps:
Application: You apply for a loan with a bank or financial institution that offers this service.
Pledging Units: You pledge your mutual fund units, which are then marked as a lien by the fund house.
Loan Disbursement: Based on the value of your pledged units and the LTV ratio, the lender disburses the loan amount.
Benefits
Quick Access to Funds: This type of loan provides quick access to liquidity without having to sell your mutual fund units.
Retain Investment Growth: Your investments continue to grow, and you benefit from any appreciation in their value.
Flexible Repayment: These loans usually come with flexible repayment options, allowing you to repay the principal and interest at your convenience.
Lower Interest Rates: When compared to unsecured loans, interest rates on loans secured by mutual funds are frequently lower.
Considerations
LTV Ratio: The LTV ratio is generally around 50-70% for equity mutual funds and 60-80% for debt mutual funds.
Market Risk: Since mutual fund values can fluctuate, a significant drop in value may require you to provide additional collateral or repay a portion of the loan.
Credit Score: The process of getting a loan approved and the interest rate that is given could still be affected by your credit score.
Loan Against Shares
How It Works
A loan against shares operates similarly to a loan against mutual funds. You pledge your shares as collateral, and the lender marks a lien on these shares. The LTV ratio for shares is typically lower than that for mutual funds due to the higher volatility of individual stocks.
Benefits
Maintain Ownership: You retain ownership and voting rights of the shares.
Capital Appreciation: Any capital appreciation of the shares benefits you, despite the pledge.
Convenience: It is a convenient way to access funds without selling your shares.
Considerations
Volatility: Shares are more volatile than mutual funds, which can impact the LTV ratio and require more frequent monitoring.
LTV Ratio: The LTV ratio for shares is usually around 50%.
Loan Against Bonds
How It Works
Bonds, particularly government bonds, are considered safer collateral due to their lower volatility and steady returns. The process involves pledging your bonds, and the lender assesses their value and disburses the loan amount accordingly.
Benefits
Stable Collateral: Bonds provide stable collateral, reducing the risk for both borrower and lender.
Predictable Returns: The steady returns from bonds can make it easier to manage loan repayments.
Considerations
LTV Ratio: Bonds have an LTV ratio that is commonly higher, between 70 and 80%.
Interest Rates: The interest rates on loans against bonds are typically lower due to the lower risk involved.
Loan Against Sovereign Gold Bonds
How It Works
Government-issued bonds backed by gold are known as Sovereign Gold Bonds (SGBs). Pledging SGBs can be a good option for securing a loan due to their high stability and government backing.
Benefits
Government Backing: The backing by the government provides high security for the loan.
Gold Appreciation: You benefit from any appreciation in the value of gold, in addition to the fixed interest offered by SGBs.
Considerations
LTV Ratio: The LTV ratio for SGBs is usually around 75%.
Interest Rates: Interest rates on loans secured by securities are often lower than those on credit cards and personal loans.
Common Features and Benefits of Loans Against Securities
Lower Interest Rates: Interest rates on loans secured by securities are often lower than those on credit cards and personal loans.
Retention of Assets: You do not need to sell your investments, allowing them to grow and potentially appreciate.
Quick Processing: The loan approval and disbursement process is usually faster compared to other loan types.
Flexible Tenure: These loans offer flexible repayment tenures, often ranging from a few months to several years.
Risks and Considerations
Market Fluctuations: The value of the pledged securities can fluctuate, affecting the LTV ratio and potentially leading to margin calls.
Loan Default: The lender may liquidate the stocks you have pledged as collateral to recoup the unpaid balance if you don't repay the loan.
Interest Rate Risk: While the interest rates are generally lower, they can still vary based on market conditions and the lender's policies.
Conclusion
Borrowing against your own money by pledging securities like mutual funds, shares, bonds, and sovereign gold bonds is an effective way to access funds without liquidating your investments. It offers several advantages, including lower interest rates, quick access to liquidity, and the ability to retain ownership of your investments.
However, it is important to consider the associated risks, such as market fluctuations and potential loan defaults. By understanding the nuances of each type of loan against securities, you can make an informed decision that aligns with your financial goals and risk tolerance.
sanju is a seasoned finance writer with over 4 years of experience in the industry. Holding a degree in finance. He has a deep understanding of financial markets, investment strategies, and personal finance, like loan against mutual funds, shares, bonds.
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