In today's dynamic financial landscape, managing money smartly is crucial, especially for individuals who seek to maintain and grow their wealth. When unexpected expenses or opportunities arise, many consider breaking their investments, such as mutual funds, fixed deposits, or stocks, to raise money. However, this decision can often lead to significant financial drawbacks. An increasingly preferred alternative is taking a loan against collateral, which offers numerous benefits over liquidating assets prematurely.
In this blog, we will explore the loan against collateral concept, emphasise why it is a better choice than breaking investments, and provide you with practical insights to make informed financial decisions. This detailed guide will highlight the advantages of opting for a collateral loan, supported by clear examples and data tailored for the market. Whether for emergencies, business needs or personal goals, knowing when to leverage your assets through a loan can be a game-changer.
Let’s dive deeper into why loan against collateral should be a go-to financial strategy rather than sacrificing your hard-earned investments. Understanding this can help you retain your investment growth potential while accessing funds efficiently.
What is a loan against collateral and why it matters
A loan against collateral is a type of secured loan where you pledge an asset—such as property, gold, fixed deposits, or shares—as security to obtain funds. The lender holds the collateral until the loan is fully repaid. Since the loan is backed by an asset, interest rates are typically lower than unsecured loans, and approval is faster with higher loan amounts possible.
In India, collateral loans provide individuals with a financial lifeline without disturbing their investment portfolio or savings. For example, if you own a fixed deposit with a bank or have real estate, you can avail a loan up to 70-80% of the collateral value. This way, your investments continue to grow or accumulate benefits like interest and dividends.
Why does this approach matter? Well, breaking investments prematurely can cause you to lose out on potential returns or incur exit penalties. Moreover, withdrawing funds when markets are down (like during a market crash) could crystallise losses. A loan against collateral allows you to keep your capital intact and continue earning, while you access the funds you need immediately.
The Reserve Bank of India (RBI) recognises the significance of secured lending since it minimises risk for banks, translating into cost-effective financing for borrowers. This system empowers you to manage liquidity smartly, protecting long-term wealth creation goals, even during financial emergencies.
In brief, a loan against collateral not only provides fast, affordable finance but also preserves your financial health by protecting your investments from premature breaking.
Benefits of loans against collateral over breaking investments
1. Maintain wealth accumulation and compound growth
When you break fixed deposits, mutual funds, or stocks, you miss out on future compounding benefits. Over time, this loss in compounding can severely impact your wealth creation. Taking a loan against collateral means your investments remain untouched and continue to generate returns.
For example, if you hold a mutual fund with an 8–12% annual return, breaking it could cost you not just the principal amount but also forfeited interest/returns. In contrast, a loan interest rate on collateral loans often falls between 8% and 14% (lower than unsecured loans), which can be less expensive than the opportunity cost of lost gains.
2. Avoid premature tax implications and exit penalties
Breaking certain investments entails tax consequences. For instance, early withdrawal from fixed deposits before maturity attracts penal interest and potential TDS (tax deducted at source). Similarly, redeeming mutual funds early might invite capital gains taxes, reducing your net corpus.
Loans against collateral do not trigger any tax events. The funds you receive are treated as debt, not income, enabling tax planning benefits. This advantage lets you stay invested without creating taxable income and having to pay exit penalties.
3. Access higher loan amounts and faster disbursal
Because collateral reduces the lender’s risk, banks and NBFCs offer larger loan amounts with quick approvals. You can avail funds worth a significant portion of the asset value (up to 85% for some collaterals). This is often more than what you can withdraw from your investments without losses.
Additionally, the approval process is quicker compared to unsecured loans, as the collateral acts as security.
4. Improve credit profile and financial discipline
Repaying a loan against collateral on time demonstrates financial discipline and improves your credit score, which is advantageous for future credit needs. Breaking investments does not contribute to building a credit history and may deplete your emergency funds, affecting overall financial stability.
5. Flexibility in repayment and usage
Loans against collateral generally offer flexible repayment tenures, ranging from a few months to several years. This flexibility allows borrowers to plan finances better, accommodating monthly EMIs or bullet repayments.
The funds obtained can be used for diverse purposes—business expansion, medical emergencies, education, weddings, or home renovations—without restrictions, unlike certain investment withdrawal scenarios.
Common types of collateral used in India for secured loans
Understanding the types of collateral accepted helps you decide the right asset to pledge for a loan against collateral:
1. Property or real estate
One of the most common and valuable forms of collateral. Both residential and commercial properties are acceptable. Homeowners can avail home loans or loan against property (LAP) with attractive interest rates. Typically, lenders offer up to 70-80% of the market value.
2. Fixed deposits and recurring deposits
Banks let you pledge FD or RD accounts as collateral for loans. This option is convenient since the asset is already with the lender, expediting approval. Interest rates on such loans are close to FD rates, hence affordable.
3. Gold
Gold loans are popular in India due to the high liquidity and universal acceptance of gold. Jewellery or gold coins can be pledged. The loan amount typically ranges from 60-85% of the current market value. Gold loans have fast disbursal and flexible tenures.
4. Shares and mutual fund units
Listed equities and mutual fund holdings can be pledged for loans with NBFCs and banks. These are marked-to-market assets, so loan-to-value ratios (LTV) fluctuate with the market. This method suits investors who want to hold positions but need interim cash flow.
5. Insurance policies
Certain life insurance policies with cash value can be used as collateral, with lenders offering loans up to the surrender value. This keeps the policy active while securing funds.
How to apply for a loan against collateral through Bajaj finance
Bajaj Finance, a trusted NBFC in India, provides customised loan against collateral products with competitive interest rates and simple procedures. Here is a step-by-step guide for a smooth application:
1. Check eligibility and choose asset type
Make sure your asset qualifies as collateral. Most lenders offer loans against property, gold, fixed deposits, and stocks/mutual funds depending on your portfolio.
2. Gather documentation
Key documents include asset proof, identity proof, address proof, and income proof. For property or gold, additional documents like valuation reports or ownership certificates may be needed.
3. Fill out the application
Complete the online or offline form with accurate personal and financial details.
4. Asset valuation and loan sanction
The collateral is verified and valued by assigned experts. On confirmation, the loan amount sanctioned will correspond to the LTV offered, ensuring transparency.
5. Disbursal and repayment
Upon acceptance of terms, funds are disbursed quickly. Repayment can be customised as per your cash flow, usually via EMIs or bullet payments.
Frequently asked questions on loan against collateral
Is loan against collateral safer than personal loans?
Yes. Since the loan is backed by an asset, interest rates are lower, and lenders have more security. Personal loans are unsecured with higher rates to compensate for lender risk.
Can I use a loan against collateral without breaking my investments?
Absolutely. The key advantage is accessing liquidity without selling or redeeming investments, preserving your wealth.
What happens if I fail to repay the loan?
Failing to repay allows the lender to claim the pledged collateral to recover dues. Hence timely repayment is crucial.
Are collateral loans taxable?
No. Loan proceeds are not taxable as income. However, if you default and collateral is sold, capital gains tax may apply on the asset sale.
Conclusion
The advantages of taking a loan against collateral instead of breaking investments are clear and compelling for investors. This smart financial tool preserves your wealth accumulation, protects against tax liabilities and exit penalties, and provides quick, affordable access to funds.
With options like loans against property, gold, fixed deposits, or stocks, you can leverage your existing assets without sacrificing future gains. Loan against collateral offerings make this process hassle-free, helping you maintain financial discipline and flexibility.
By choosing a loan against collateral, you gain peace of mind and keep your investments working hard for your financial goals. Next time you face an urgent need for funds, consider this approach rather than compromising your investment portfolio.
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