Benefits Of Secured Borrowings In Times Of Need

One of the big changes that has occurred in recent times has been the large expansion of investments in various areas by retail investors. This encompasses a wide range of options, from mutual funds to stocks, and reflects a significant shift in investors' resources towards financial investments. Simultaneously, there has been a surge in the variety of loans taken out by individuals, and if these loans are unsecured, their costs can be significantly elevated.

Now another option is emerging in the form of borrowing against securities, and for those looking for funds, this mode can be evaluated for its features.

One of the biggest worries in the Indian economy in recent times has been the boom in unsecured lending. The banking regulator has issued several warnings about this kind of lending and the problems that can arise if there is a burst of nonpayment. Several regulatory conditions have also been tightened with respect to these borrowings. One reason for the shift toward secured lending is that the lender's risk is lower and the borrower can get the money quickly. For the borrower, this translates into a situation where they have a large choice of lenders to whom they can go.

The big benefit that the borrower has when they resort to secured borrowing, which is taking money against shares or mutual funds, among others, is that the cost for this type of money is lower. The various forms of unsecured lending impose a hefty interest rate, which makes sense given the lender's lack of security over the provided funds. The higher rate is meant to compensate for this particular situation and the risk of nonpayment. On the other hand, when it comes to loans against securities, the lender has the backing of a present security, which they can sell to recover their money if the borrower is unable to repay. The benefit comes in the form of a lower interest rate, which leads to a lesser burden on those who are taking the money.

One way people raise money is by selling their investments, which can put them back in the wealth creation process. When it comes to secured borrowings, there is no need to undertake a sale of the investment for the individual. They retain ownership of the investment while it serves as security, enabling them to raise the necessary funds. As long as the need is temporary or that they have a clear plan as far as the repayment is concerned, the owner of the investment will end up on the positive side as they get to keep the investment and still get the needed funds. If these are investments that yield a higher return, then the benefit can turn out to be even greater.

A lot of such secured borrowing has now moved online, and this gives an additional benefit to all those who are looking to raise money this way. This is the convenience that comes with the process because it can be done online without massive amounts of paperwork, and the money is received in the bank account quickly. However, one has to be very careful when it comes to anything that is easy, as this can lead to wrong decisions taking place. Every person has to be careful when making such borrowings because this has to be only in case of real need and where other options are not available; otherwise, financial discipline can be compromised.

Arnav Pandya is founder of Moneyeduschool