Here is all you need to know for getting a Loan against Property (LAP)/Shares & Debentures/Mutual Funds/Gold Jewellery:
Mr. Kunal Kapoor was in urgent need of funds for a medical emergency. He could not arrange the same from his friends and relatives and the only option he could think of was a personal loan, little did he realise that he could have leveraged the jewellery in his bank locker or the mutual funds & shares that he owned. Had he availed the loan against gold or shares he could have saved considerable amount of interest that paid for the personal loan.
Most of the people are not aware that they can avail loan by keeping their assets with banks or NBFCs as collateral in case of immediate fund requirements. Also, the interest charged by the financial institutions on such loans is usually lower than that on the personal loan. The post below will take you through the details on the loan facility available against various assets.
Loan against Debentures, Shares & Bonds
You can avail a loan against debentures, shares and bonds to meet contingencies and for the personal requirement or for subscribing to new or rights issues of debentures, shares or bonds or for purchase against the security of debentures, shares or bonds in the secondary market.
The maximum limit for the loan amount is Rs. 10 lakhs per person, for the securities held in physical form & Rs. 20 lakhs per person , if the securities are held in a Demat form. The banks maintain a minimum margin of 50% of the market value of convertible debentures or equity shares if they are held in the physical form and a minimum margin of 25% in case the securities are held in a Demat form. You are required to submit a declaration to the bank indicating the amount of loan availed from other banks for the purpose of credit evaluation.
Note: The banks may determine the minimum margin for loans against non-convertible debentures/preference shares and bonds as per their own requirement.
Loan against Mutual Fund Units
You can avail loan against the mutual fund units. Some of the conditions to avail such loan are listed below:
• The mutual fund units should be listed on the Stock exchanges, or repurchase facility of the units must be available at the time of borrowing the loan.
• The units must have completed the minimum lock-in period for the scheme.
• The loan amount to be availed will be linked to the Nets Asset Value (NAV)/repurchase price or the market value of the fund; whichever is lower.
• The quantum and margin for the loan against mutual fund units (except units of debt oriented funds) will be same as that for a loan against debentures, shares and bonds.
• The quantum and margin for a loan in case of debt oriented funds varies from one financial institution to other based on its loan policy.
• The loan will not be granted for subscribing to another mutual fund scheme or for the purchase of debentures, shares or bonds, etc.
Loan against Gold Ornaments & Jewellery
You can avail loan from banks and NBFCs by pledging your gold ornaments and jewellery. Some of the important points on such loan facility are listed below:
• The maximum loan amount that can be availed from banks against such assets shall not exceed 75% of the value of such assets. This maximum cap is also known as Loan to Value (LTV) ratio.
• LTV ratio is calculated based on the total outstanding amount in the account which includes accrued interest, and the present value of gold jewellery accepted as collateral by the banks.
• The banks maintain LTV ratio of 75% throughout the loan tenure.
• The loan tenure and interest rate vary from product to product. Also, the interest rates charged by NBFCs are usually higher than the banks.
• The maximum loan tenure is 12 months from the loan sanction date.
• Hallmarking of gold jewellery plays a crucial role in the determination of margin and interest rates on loan.
• You have to submit the application form along with the proof of identity and address with your bank to avail loan against gold ornaments and jewellery.
• The gold ornaments and jewellery pledged to avail the loan is valued by the banks at the average of the closing price of the 22 carat gold for the past 30 days as quoted by the India Bullion & Jewellers Association Ltd. or the historical spot gold price data published by a commodity exchange regulated by the Forward Markets Commission.
• If purity of gold is less than 22 carats, the banks translate the collateral into 22 carats and value it accordingly.
Note: Do check for the charges such as loan processing fee, valuation fee, foreclosure charges, late payment charges, prepayment charges, etc. before you avail such loan. Different banks may have different charges as per their loan policy.
Loan against Property (LAP)
If you have a residential/commercial property, you can mortgage your property with the bank or NBFCs when you have a large fund requirement and is not able to arrange funds from any other sources available to you. Listed below are few of the important points on LAP:
• In LAP, there is only a “transfer of interest” and NOT the ownership of the property to the bank, as per the Transfer of Property Act, 1882.
• The ownership of the property gets transferred to the bank only in case of default by the borrower.
• You can avail loan for personal as well as business purpose such as education, marriage, medical expenses, business improvement, etc.
• Loan value depends on the property value assessed by the lender and ranges between 50-70% of the market value of the property.
• Factors considered by the banks/NBFCs before offering you a loan includes your age, employment status, salary, qualification, credit score, the number of dependents, assets & liabilities, repayment ability, etc.
• Documents required by the banks/NBFCs may vary based on the occupation status of the applicant i.e. salaried individual/self-employed professional or individual.
• For a salaried individual, financial institutions ask for proof of identity, proof of residence, bank statement for past six months of the account where the salary is credited, salary slip, and document copy of the property which has been kept as collateral. In case of self-employed professional or individual, financial statements for the last three years are required.
• You can choose between fixed & floating interest rate.
• You may also get an option to choose for part or prepayment of the loan.
• Loan amount could be as high as Rs. 10 crores and loan tenure could be up to 15 years like in case of ICICI Bank.
• EMI would be lower as LAP has a longer tenure.
• You can avail the loan facility in a lump sum or in the form of overdraft facility.
• Apart from the interest rate charges, banks may also levy charges such as loan processing fee, prepayment charges in case of fixed rate loans, late payment charges for EMI payment, etc.
• There is no tax benefit available for the repayment of loan against property.
Also read: Pre-EMI Vs EMI
Had Mr. Kunal been prudent enough to take a holistic view of his financial decision, he could have avoided the high cost personal loan. It is therefore important that you plan your finances in such a way that it provides ample cover against contingencies and help you to achieve your goals.