How to Use Mutual Funds and Shares as Collateral for a Loan

If you’ve been looking for loans, you might have come across the word, collateral. Collateral plays an integral part in determining the type of loan and the terms that will follow. It refers to the assets you offer to a lender to receive credit. Think of it as a means of security that you pledge in return for the funds that the lender provides you.

The loans that use collateral to disburse funds are called secured loans. Inversely, loans that don’t involve collateral are called unsecured loans.

To avail secured loans, people usually offer tangible assets like property, jewellery, car etc. as collateral. However, they often forget that investments like shares, mutual funds, bonds etc. can be financial assets too. You could choose to offer them as collateral by taking a loan against shares.

Like all collaterals, your shares and mutual funds act as an assurance to lenders if you default. A lender has the power to take over possession if you stop repaying the EMIs.

This reduces the risk involved for the lender. Thus, the lender can offer you better benefits when you offer mutual funds and shares as collateral for a loan.

Here are a few advantages of taking a loan against shares:

Quicker loan approval

When you apply for a loan against shares, you offer your stocks and mutual funds as collateral to receive money. In such a situation, the lender is likely to consider you as less of a risk and will be quicker to approve your loan.

Lower interest rate

The loan against shares interest rate is usually lower than other types of unsecured loans. Since this is a secured loan, lenders are generally in a much safer situation when lending. As their risk reduces, they are in a position to offer you benefits. Obtaining a low-interest rate reduces your monthly instalments and affects the total cost of the loan too.

How to use your financial assets as collateral for a loan?

Offering your financial assets like mutual funds and shares as collateral is akin to providing your tangible assets like property or jewellery as safekeeping for a loan. You need to approach a bank or Non-Banking Financial Company for a loan against shares.

Once you match the eligibility criteria for a loan against shares and submit the documents, you’ll need to sign an agreement pledging your shares as collateral. Through this agreement, you offer your shares to the lender in exchange for funds. The lender will now have possession of your asset and can claim it if you fail to repay the loan. However, even though your assets are pledged to the lender, you can continue to own the shares and benefit from them as a shareholder.

The lender will then verify your application and process the loan. Once the loan amount is in your bank account, you can access it anytime you want. You could even choose to withdraw it in parts and the interest will be charged only on that amount.

If you have a healthy portfolio of listed securities, you could use them to take a loan against shares. Taking a loan against financial assets is a better option than liquidating them for instant cash. This way you get to retain the shares until you repay the amount, and at the same time continue to make the most of your investments in the future.