Recently, the demand for loans has been huge. It’ll most likely continue to grow due to the not-so-favorable global events. That gave the wind in the back of lenders to come up with different financing options for different clients so that everyone can find a deal according to their needs and possibilities.
There are many loan types, but the common division is between unsecured and secured ones. As their name suggests, the first ones don’t require any guarantee that you’ll repay the debt. Instead, lenders rely on your credit history and good credit score. These are mostly short-term and small loans, so the chance of default is low. However, to compensate for even the slightest risk of loan default, lenders approve such arrangements with slightly higher interest rates.
On the other hand, secured financial arrangements ask for pledging something to get money. Based on that, you have more chances to get your finances in order. Against collateral, you can borrow more money, ask for a longer repayment period, and even get a lower interest rate. The risk for lenders is almost non-existent; even if you default on repayment, they can repossess your asset and thus cover up their losses.
Many assets can serve as collateral. Conventional and tangible ones are real estate, works of art, vehicles, or jewelry. But lenders now accept digital assets such as pension funds and securities. Based on the latter, they now offer lån til aksjer and thus allow people to borrow money against the shares in their investment portfolios.
How to Borrow Against Securities?
People who think about their financial future save money but also invest it. Securities should be a part of every well-designed investment portfolio because these assets can contribute to its diversification and bring significant profit. Plus, you can use them as a way to get a loan.
When borrowing money against your shares, it works just like any other loan. You’ll ask for the amount you need; in return, you’ll pledge shares of equal (or higher) value. Lenders will consider the current market value of your securities, which is highly variable.
Lenders can take advantage of your securities if they repossess these assets after you fail on loan repayment. But while you’re paying off your debt, lenders might hold your securities. You still earn dividends and passive gains on these assets. But you can’t sell them until you repay the debt. At the time of loan closing, you’ll get your assets back, and you can trade them as usual.
How to Apply
Getting this loan is like selling your stocks and buying them later when the price increase. So collateral should represent almost 100% of the borrowed amount, although some sellers ask for this coverage to be up to 104%. In that way, they reduce the risk of potential losses in the case of a market crash.
As for the application and funding procedure, you’ll need the help of certified brokers or dealers. Of course, their services aren’t free, so make sure to know their rates before cooperating with them.
Dealers usually speed up and control the process between borrowers and lenders. Thus they can find you a proper loan offer and let you sign the agreement that contains borrowed amount, tenure period, interest rates, establishment and other fees, etc.
Benefits of Financing against Shares
A diverse investment portfolio has many benefits. If you look at the long term, investing in different investment vehicles spreads your risk of loss and boosts your chances of preserving and increasing your wealth. And publicly-traded securities are probably the best way to achieve passive gain with minimal risk.
In the short term, these stocks from your portfolio enable you to get a favorable deal. In that way, you can actually earn multiple times on your securities. They certainly bring profit as you still earn dividends, bonuses, etc. But they also allow you to get extra cash by taking out a loan when market conditions are promising.
Favorable Lending Terms
Another benefit of borrowing against securities is that you can get more favorable loan terms than any other method of financing. The interest rate is only a few percent, which is way better than any other secured loan. And since this rate is a major expense you consider when borrowing money from lenders, you can take advantage of it.
You can use this money any way you want. Lenders might ask you to give them the reason why you need money, but they don’t limit you on how to spend it. That comes in handy when you need financial aid urgently.
Application Procedure Is Simple
Applying for this type of financial arrangement is simple. Most banks and lending companies provide online application forms to fill out, submit a few required documents, and eventually get in touch with the lender.
The eligibility criteria differ a bit from regular loans since the lenders assess your creditworthiness based on the value of your portfolio, not solely your income and credit score. That speeds up the approval procedure, so in the best case, you can have money in your bank account the next day.
Improving Market Liquidity
In addition to obvious advantages for borrowers, taking out loans against shares can also have significant (favorable) consequences for the entire market. For example, you can always get the necessary money this way and ‘pour’ it into the market. In other words, financing against securities brings greater liquidity to the market.
Risks of These Arrangements
As already said, if you take a loan against securities from your portfolio, you put your stocks and bonds as collateral. Lenders usually accept all kinds of shares, but they’re most likely to lend you money if you own some high-value stocks in your portfolio. These are usually publicly-traded stocks and bonds since they’re easy to sell.
Probably the only limitation is that no lender will accept shares and bonds of your own company.
Lenders calculate the value of your assets at market prices and grant you a specific loan based on that value. Securities remain in your portfolio, but until you pay off the debt, you don’t own them entirely. That means you may miss some favorable moments for selling at higher prices.
Another risk is that of loan default. If you’re late with the installment or simply don’t meet your obligations, the lender has every right to repossess the collateral. That way, they can sell your securities and collect their claims. The price at which they will sell the collateral can be significantly different from the price they granted you the loan.
That can be both good and bad. As many factors affect the price of securities, they can fluctuate significantly daily. That carries certain risks for borrowers (if they lose ownership of shares, they lose potential profit) but for lenders, too.
Risks for Lenders
Securities used as collateral can’t guarantee stable value over the long term. Their price follows the market demand, so it can go up and down in a matter of minutes. For instance, if the share price drops, it loses its value as collateral, as now it’s not enough to cover the outstanding amount.
And if you fail on loan repayment during low stock prices, the lender will be at loss. In the worst cases, the stock market can collapse, so the securities pledged as collateral might be worth nothing. That indicates that this type of loan is not fully guaranteed, but that’s not the borrower’s fault.
Secured loans are an excellent opportunity to take out larger sums of money and solve many problems. If you have nothing valuable and tangible, lenders will gladly accept digital or paper assets such as securities. They can provide you with affordable loans without too much hassle, but you must understand both advantages and risks of these financing options.