Which Loan Against Security Option is Best for You?

Last Updated : Dec. 27, 2019, 3:27 p.m.

At a time when a financial emergency can crop up anytime, you could feel for instant cash, such as a personal loan. But if you have had a poor repayment record or don’t have any credit history, the loan can be denied. Don’t lose hope! There’s a lifeline for you i.e. a loan against security, which can be anything from fixed deposit, mutual fund or a life insurance policy. But, which security should you pledge to avail of the loan? If you have a lot of securities, you have a choice to make! Firstly, the rate of interest would differ based on the risk profile of the securities. Just ensure whatever you choose must reduce your cost and give you the convenience at the same time.

Loan Against Fixed Deposit

Having a loan against a fixed deposit is perhaps the easiest route an individual can opt for. Fixed deposits can be opened with an amount as low as ₹1,000. The fact that a fixed deposit is a very low risk product, you can get a loan to the tune of 80%-90% of the value of the said security. As far as the interest rate goes, it can be a few percentages above the FD rate.

Loan Against Mutual Fund

You’ll be surprised to know this, but it’s a truth and a good one. However, the loan norms can differ based on the type of mutual fund you have. There are three types of mutual funds – equity, debt and hybrid. Loans for equity funds can be granted upto 50% of the existing investment value, while for debt funds the quantum can go upto 80%. The greater loan quantum in the case of debt funds is purely because of the lesser risk product in comparison to its equity counterpart. When it comes to hybrid funds, the loan quantum can be anywhere between 50% and 80% of the investment value. The investment value will dictate the number of units that will be pledged.

Loan Against Shares

As shares are considered riskier just like equity funds, one can get a maximum of 50% loan on the market value of the said security.

Loan Against Bonds

Loans can even be granted against bonds that are issued for 10, 20 and 30 years. You can get as much as 80% of the face value of bonds.

Loan Against Life Insurance Policy

Lenders can also grant loans against endowment policies of life insurance. Around 70%-80% of the surrender value can be given as a loan.

Conclusion

Since it’s about a loan, you must not choose risky financial security to grab it. If the chosen security does go down rapidly in its value, you won’t find it okay to pay the loan EMIs . That’s why it’s advisable to opt for safer security to sway away from the rapid market fluctuations.