Let’s say you hold investments worth ₹5 lakh and a medical bill of ₹1 lakh comes up next month. Selling those shares means that you may have to give up future gains. There is another option that many people consider, where you can borrow against your holdings. This article explains what you should check before you apply for a loan.

How Does Borrowing Against Your Holdings Work?

When you pledge your holdings, the lender places a hold on them; however, you still own them, and any gains or dividends stay with you. The lender then offers a credit limit based on a percentage of their value. For example, a loan against bonds may allow you to borrow a higher share of the value, since bonds tend to move less in price. Riskier holdings usually get a lower limit.

You can also explore a loan against mutual funds online if you want to borrow against eligible mutual fund investments without selling them. The amount available will depend on the value and type of mutual fund units you hold.

Questions To Ask Before You Apply

Each lender has their own conditions/rules, so be sure to understand them well before accepting any loan. In case you are looking at a loan against equity, find out how much of your stock market investments the lender values and what happens in case of losses. This should be in writing since there could be huge differences in terms from one lender to another, so it makes sense to get a few quotations and compare them.

Here is what you should consider first:

• Interest rate and whether it is fixed or changes over time
• Processing fee, late fee, and any charge for closing early
• The loan-to-value ratio, which is the share of your holding's value you can borrow
• The point at which the lender asks for more security or sells your holdings
• Risks That You Should Plan For

The biggest risk is a price drop. Now, let us consider that you have pledged shares that are valued at ₹5 lakh, and the amount of loan taken is ₹3 lakh. In case of a 30% fall in the market, your shares will become worth ₹3.5 lakh, and then you would be asked by the lender to either provide additional security or partially repay the loan. With a loan against shares, in case of a steep fall in the market, the shares might have to be sold at low rates.

A digital platform where you will be matched with lenders helps only in applying. It does not approve the loan or decide interest rates or give any timelines. The lender will conduct an identity check, a credit check, process the paperwork and collect documents according to the guidelines of the Reserve Bank of India. Any charges will be disclosed by the lender, so always request the total amount in rupees. Remember to monitor the repayment schedule as delays may affect your credit score and pledged investments.

Conclusion

Collateral loans enable you to quickly access money without the need for selling your investments when prices are unfavorable, but you must do so effectively by borrowing little and planning how you will repay. It is advisable to compare various options and understand what happens in case of price reductions. A loan against your investments should be considered when you need to meet immediate requirements like paying hospital bills or taxes.