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Definition: Non Purpose Loan
Non purpose loans are the loans in which the investment portfolio of the investors can be used as collateral for taking more loans from lenders. Through, non-purpose loans investors are able to retain their investment portfolio and also at the same time are able to obtain or take more loans from the market or various other kinds of lenders. Although, financial institutions need to specify that whether the loans are purpose loans or are non-purpose loans. These kinds of loans are very useful for HNI’s, since they are able to take more loans from the market on the basis of their brokerage accounts. Hence, these kinds of loans are also called as securities based lending.
However, according to the law, the cash that the clients get through non purpose loan cannot be used to buy more stocks or securities or mutual funds. If the value of security that is used as collateral for non-purpose loan declines over the period of time, then in that case the lender may ask the borrower either to buy more securities to compensate for the lost value of the initial securities used as collateral or to repay the amount equivalent to that of the lost value of the security.
These kinds of loans are encouraged to provide benefits to the clients such as meeting the cash flow requirements of the business or to help them in financing mortgage loans to other borrowers at higher rates etc. Generally, banks are allowed to provide loans upto 90% of the value of the securities used as collateral. However, borrowers need to provide the affidavit for the same.
The main advantage of taking these kinds of loans are:
• Minimum paperwork
• Less due diligence as compared to other types of loans since the securities that are being used as collateral are already lying with the various financial institutions
• Investors can still receive various other benefits from their portfolio investment such as dividend payments, bonus shares etc.