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Why Borrow Money When You Can Borrow Against Your Investments

by Era Inventions
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People usually think of debt as a significant matter. Still, one might be able to use it to their advantage if it is well planned and secured. Individuals having a brokerage account with a decent size portfolio and needing money for a one-time expense might be able to get a portfolio loan or line of credit, basis the investments pledged as collateral.

There are numerous options for loans against securities or loans against shares, or loans against mutual funds as collateral loans facilitated byNBFCs like  Abhi Loans [1] [2] and other financial institutions.

The banks that offer these lines of credit based on securities call them by different names, but they all work pretty much the same way. Once there are approvals on applications, the borrowers shall get the loans quickly processed. 

Loan against securities is not recommended to purchase more shares or other securities as a direct outcome, as such a process is classified and executed under a Margin Trade Funding structure. It is a kind of loan against securities offered within the brokerage account as a margin fund for a small monthly interest fee.

The loan value approved depends on the bank that gives the credit line. But generally, the loan against securities is around 70% of the value of the assets one is ready to put up as collateral.

Abhi loans, the NBFC also makes its customers aware that the risk integral to the portfolio or the collateral offered can also affect how much a bank will lend you.

Borrowers shall be eligible for more money as a loan against securities if the assets are safer. In an illustrative scenario, when a customer relies on bonds as collateral instead of risky stocks, the probability of higher loan values getting approved as a loan against stocks or a loan against securities is possible.

The most immediate risk in this kind of loan against securities is that in the case of any value of investments will drop, at which point, the borrowers may be asked to put more money into the account holding the collateral.

In any untoward market conditions wherein the collateral securities are losing their value beyond certain limits, the borrowers are asked to add more collateral for loans against securities.

Borrowers failing to do so within the stipulated time can trigger the scenario wherein the lender sells the assets from the account to recover the loan dues.

When it comes to taking up loans or borrowings, a loan against securities comes at a lower rate of interest as compared to other instruments like personal loans. This is because lending rates are beneficial to a borrower when there is a guarantee or a mortgage.

Personal loans and other such instruments are not backed by any mortgage, unlike a loan against securities.

The other dimension of seeing the loan against securities as a potential option as advocated by Abhi Loans, is that of not needing to sell investments to get the cash required and can make use of the portfolio line of credit. This is because borrowers don’t have to sell assets having potential value going up.

In addition, if the interest rate being paid on the borrowed money is less than what the portfolio earns, the math works in the borrower’s favor.

Borrowers, on the other hand, chose to sell investments, and they were worth more than the value of buying them; the issue of having to pay capital gains tax is imperative.

Short-term gains (from investments held for less than a year) are taxed as regular income, while long-term gains are taxed differently.

As an alternative, if there are good dividend-paying stocks in the portfolio, it could cover the loan interest rates to some extent, while the portfolio works as potential collateral for a loan against securities.

@hrishikesh@firsteconomy.com – Please reframe this.

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