A bond is an income instrument through which an investor provides a loan to the bond issuer. Financial institutions provide loans against bonds that an individual can utilise to meet their monetary needs.
These institutions offer loans on such bonds on the basis that the bonds are from a recognised establishment. In addition, loans against bonds work as an overdraft facility. Individuals can withdraw money from a pre-determined credit limit and pay interest only on the utilised amount for the period they utilised it.
Do market conditions affect loan against bonds?
When availing loans against bonds, the market conditions do not impact the credit limit. It does not affect either the principal amount or the interest rate. An individual will get a credit limit of up to 95% of the value of bonds, subject to discretion of each lender, while availing such loans and thereby bonds market dependency does not play any role. However, if an individual opts for a loan against shares, the credit limit will be based on the market value of the shares.
An individual can borrow full, or a part of the limit depending on their requirement and repay it through instalments during the tenure. Furthermore, every time the individual pays an instalment, the principal component of the instalment amount is added back to the limit, making it available once again for borrowing.
What are the features of a loan against bonds?
Following are some features of loan against bond:
- Individuals need to pay interest only on the loan amount utilised. They need not pay interest on the total approved amount.
- Loan amount sanctioned depends on the value of a bonds and the overall eligibility of a borrower.
- Processing fees of a loan against the bond varies from lender to lender. Some lenders may charge a processing fee of up to 4.72% of the credit amount.
- Interest rates for loan against bonds vary from lender to lender. Some lenders may charge interest rates up to 20% p.a.
- A borrower can still earn his/her income from bonds while availing a loan against the bonds.
What are the things to remember before opting for a loan against bonds?
Whenever an individual seeks a loan against bonds, he/she should remember the following:
● Comparing lenders
An individual should perform thorough market research when applying for a loan against bonds and opt for a lender that provides a high loan-to-value ratio depending on the bonds.
● Checking the list of approved instruments
While conducting research, a borrower must ensure that the bonds he/she owns are eligible for availing loan in a lending company’s approved list. Certain instruments are accepted by almost all financial institutions, while some others may be conditional.
● Matching required criteria
When opting for a loan against bonds, it is recommended to check the lending company’s eligibility requirements and the set of documents they need for processing such loans. A borrower must fulfil these criteria to avail such loan facilities.
● Comparing interest rates
Individuals must compare the interest rates provided by various financial institutions. Interest on loans against bonds is not levied on the total credit limit but only on the utilised amounts. Therefore, choosing a lower interest rate will help individuals to save a lot.
How to apply for a loan against bonds?
A borrower can follow the procedure mentioned below while applying for a loan against bonds:
Step 1: Choose and visit the website of a financial organisation
Choose a lender that offers various benefits and visit their website to apply for the loan.
Step 2: Fill in the required details
You may need to fill in basic information like name, phone number, and email ID to proceed with the application.
Step 3: Select the type of securities and fill in the value
After filling out the form, individuals need to select the type of security and fill in the value of the bonds. Check the term and conditions carefully before proceeding with the application process.
Step 4: Post-form fill-up procedure
Post form fill up, the lender will contact you for further proceedings.
The total loan limit will be calculated based on the valuation of bonds and the amount will be made available post-calculation and verification.
Loan against bonds is one of the safest options for availing loans. It is because an individual can earn income while availing of a loan against bonds. This loan is uniquely useful as the borrower needs to pay interest only on the utilised loan amount rather than the total approved credit.
