BAJAJ BROKING
June 05, 2025
5 mins read
Within financing and debt securities, loans and bonds serve critical functions with extensive differences in structure, utilization, and access. A bond is a debt security sold by organizations like the government or companies to secure capital. Bond buyers are rewarded with interest payments in the future, coupled with the principal on maturity. Conversely, a loan is a contractual agreement in which a lender advances money to a borrower for a definite purpose, repaid with interest over a stipulated period of time.
Though both are used to fulfill financial requirements, it is important to know the difference between a bond and a loan to ascertain the right utilization of each, especially while considering alternatives like a loan against a bond.
A loan against bonds provides investors with an opportunity to leverage their current bond holdings as collateral to gain access to liquidity without selling them. This is a common method of financing that people use to fund short-term financial needs while retaining their investments.
Usually, the lenders determine the market value, credit grade, and type of bonds first before sanctioning the loan amount. The amount sanctioned under the loan typically corresponds to a percentage of the bond's present market value, referred to as the Loan-to-Value (LTV) ratio. The greater the creditworthiness and liquidity of the bond, the larger the amount that can be sanctioned under this scheme.
Borrowers still get interest payments on the pledged bonds, but the lender reserves the right to sell the securities in case of a loan default. This method allows access to funds while keeping the integrity of the investment portfolio intact.
Several types of loans can be availed by pledging bonds as collateral. These include:
These are conventional loans where a sum is given at a pre-decided tenure for a fixed amount with a fixed or floating interest rate. The loan is paid back by the borrower through EMIs over the tenor of the loan. Term loans are ideal for the financing of long-term requirements like business growth, housing repairs, or capital outlays.
An overdraft enables the borrower to draw cash from their account even when there is zero balance, subject to a limit sanctioned. Interest is levied on the amount borrowed for the period it remains borrowed. Collateral bonds utilized to establish the overdraft limit make it an elastic instrument to finance working capital or short-term cash shortages.
An LOC is a revolving credit facility that provides borrowers with access to a fixed amount of funds, which can be borrowed, repaid, and borrowed again when necessary. Secured by high-grade bonds, an LOC has lower interest rates than unsecured credit. It's good for frequent business requirements or liquidity management on an individual basis, being more flexible than term loans.
Demand loans are repayable at the call of the lender, i.e., the lender can ask the borrower to return the loan with short notice. Demand loans tend to be of short duration and are approved in terms of market value and grade of the offered bonds. Demand loans are suited for satisfying urgent or transient funding requirements.
Government-guaranteed tax-free bonds are also eligible to be used as collateral, based on the lender's risk evaluation guidelines. Even though the interest earned on these bonds is tax-free, the loan taken against them might have certain valuation standards and marginally higher eligibility standards because of their lower return. These loans are popular among investors who want to hold on to ownership while seeking liquidity.
Both are methods of raising capital, but they differ in structure, issuance, and flexibility. Here’s a comparison table illustrating bonds vs loans differences:
Parameter | Bonds | Loans |
Definition | A debt instrument issued by entities to raise funds from multiple investors. | A borrowing agreement between a borrower and a lender, typically a bank. |
Issuer/Lender | Issued by corporations, governments, or institutions to the public or other institutions. | Issued directly by banks or financial institutions to individuals or businesses. |
Borrower | The entity issuing the bond. | The individual or business borrowing the funds. |
Repayment Structure | Usually repaid on maturity with periodic interest payments (coupons). | Repaid in EMIs or bullet payments as per the loan terms. |
Tradability | Can be traded in secondary markets before maturity. | Not tradable; remains between the original borrower and lender. |
Collateral Requirement | It may be secured or unsecured depending on the bond type. | Often requires collateral, especially for larger loan amounts. |
Regulatory Oversight | Regulated by market authorities like SEBI (in India) or SEC (in the U.S.). | Regulated by banking and financial institutions. |
Flexibility | Less flexible; terms are fixed once issued. | Can be negotiated to suit the borrower’s needs. |
Investor Base | Can attract a large number of institutional and retail investors. | Limited to a single financial institution. |
Cost of Funds | It may be lower for reputable issuers due to market competition. | It may be higher depending on the credit profile and negotiation. |
Taking a loan against bond is possible under specific financial situations. For instance, if someone needs short-term liquidity but is not in a position to sell their bond investments, pledging them for a loan can give access to funds immediately while preserving the investment.
In the same way, this method can be applied when market conditions are unfavorable for bond selling, or when the bondholder wishes to keep the interest earnings on the bond periodically. It also provides flexibility in handling financial obligations and does not disrupt long-term financial planning.
However, this funding instrument is typically appropriate if the value of the bonds is not volatile and the borrower has faith that they can pay back the loan within the given timeframe.
Taking a loan against bonds is an effective way to unlock liquidity without having to sell your investments. It allows you to leverage your bond portfolio for immediate funding while retaining ownership. Some of the commonly noted benefits include:
You continue to own your bonds, allowing you to earn interest income and capital gains while using them as collateral.
Secured loans against bonds typically come with lower interest rates compared to unsecured loans due to the reduced risk for lenders.
Loans against bonds are processed faster with minimal paperwork, ensuring quicker access to funds when needed.
You can unlock the value of your bonds without selling them, allowing you to avoid any losses in unfavorable market conditions.
Lenders may offer flexible borrowing arrangements such as overdrafts or lines of credit, providing easy access to funds as required.
Before availing of a loan against bond, several factors need to be considered:
A drop in bond value may lead to margin calls or lower LTV ratios.
Bonds with lower ratings may not be accepted or may fetch a lower loan amount.
Defaulting on repayment may lead to the liquidation of the pledged securities.
Not all bonds are accepted; policies vary across institutions.
Processing fees, prepayment charges, and tenure limits may apply.
Applying for a loan against bonds typically involves the following steps:
Before applying, evaluate the bonds you wish to mortgage. They should be good quality and readily accepted by lenders (for example, government securities, corporate bonds). Your bond value will determine the amount of loan you can obtain.
There are several banks, financial institutions, and non-banking financial companies (NBFCs) that provide loans against bonds. Compare interest rates, processing charges, loan-to-value (LTV) ratio, and repayment period to get the effective deal.
Lenders might demand certain conditions, such as a certain bond value, credit rating, or bond types that are allowed as collateral. Make sure to fulfill the required eligibility conditions your preferred lender may have.
Typical documentation includes:
Proof of identity and address (e.g., passport, utility bills)
Bond certificates or demat account statements
Proof of income (in some cases)
Application form filled with relevant details
Once submitted, the lender will evaluate your bonds' market value, your eligibility, and your credit profile. If everything checks out, the loan will be approved, and you’ll be provided with the loan amount.
Upon approval, you’ll sign the loan agreement, which outlines the loan amount, interest rate, repayment terms, and collateral conditions. Carefully review the terms before signing.
Once signed, the money will be deposited into your bank account or, according to the terms, within a few business days.
Knowledge of the difference between bond and loan assists borrowers and investors in making rational decisions according to their objectives. Bonds are long-term investments with constant returns, whereas loans are immediate sources of funds. A loan against bonds unites the advantages of both by enabling people to hold on to their investments while fulfilling short-term liquidity requirements. Through a detailed scrutiny of the terms, risks, and advantages of loans against bonds, one can integrate this tactic into his or her plans for investment options, thereby fulfilling their requirement for funding without compromising their financial growth opportunity.
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Bonds are debt instruments offered by organizations to mobilize funds from investors at fixed yields over a period. Loans are outright borrowings from banking organizations, typically with collateral, and repayment flexibility. Bonds can be traded; loans cannot.
Yes, you can borrow a loan against your bonds by putting them up as collateral. Loan providers lend based on the face value of the bonds, bringing liquidity while still keeping you with ownership and rights from the bonds.
Using a loan against bonds enables you to draw liquidity without liquidating investments, receive lower interest rates as collateral, hold bond ownership for continuous returns, and enjoy flexible terms of the loan, while maintaining market risks and tax benefits intact.
Before taking a loan against bonds, consider risks such as interest rate fluctuations, margin calls if bond values drop, the risk of losing collateral if unable to repay, and the impact on your investment portfolio’s overall performance.
To get a loan against bonds, assess your bonds, compare lenders, and confirm eligibility. Provide documents such as bond certificates and proof of identity. Upon approval, sign the contract and obtain the loan amount.
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