What Is a Loan Against Bonds and How Does It Work?

A loan against bonds is a secured loan in which loan applicants pledge their bond holdings as collateral to borrow funds. This financial instrument allows one to leverage fixed-income investments without liquidating them. Loans against bonds are considered ideal for meeting short-term liquidity needs.

• Pledging the Bonds: Loan applicants pledge their bonds to loan providers like banks or Non-Banking Financial Companies (NBFCs). Bonds eligible for loans typically include government securities and corporate bonds.
• Loan-to-Value Ratio (LTV): The loan provider evaluates the bonds' value and offers a loan amount that is a fraction of the Net Asset Value (NAV) of the pledged mutual fund units. This ratio, also known as the LTV ratio, can vary depending on the bonds' type and rating.
• Loan Disbursement: Upon approving the loan application, the loan provider disburses the loan amount directly to the applicant's bank account.
• Repayment: One can repay the loan through EMIs depending on the agreed terms. During this period, the bonds remain pledged with the loan provider but continue to accrue interest.
• Release of Bonds: Once the applicant repays the loan in full, the pledged bonds get released.

Loans against bonds enable applicants to unlock the value of their bond investments while retaining ownership and potential returns.