Cash secured financing - the cheaper option!

29th September 2015


Where the banking sector is hesitant to provide unsecured and collateral free loans to the consumer base, cash secured financing is readily available through all banks. How does cash secured financing work and why is it useful to the consumer?

Cash secured financing allows an individual to borrow from the bank, based on a collateral in the form of fixed deposits, or liquid cash reserves. The markup charged on such a financing is considerably lower than personal loans – usually varying 100-300 basis points above the prevailing KIBOR rate. Unlike a personal loan, where specific credit inquiries are conducted into an individual’s employment and monthly income, cash secured financing can be availed by any individual pledging liquid reserves to the bank.

The biggest argument against cash secured financing is of redundancy. Why would you deposit your savings with a bank for a certain profit rate and later borrow the same amount at a higher markup? From a rational perspective, it would not make sense. However there are certain instances where cash secured financing is economically beneficial to the consumer.

  • Pledging Defence Savings and Special Savings Certificates (DSCs and SSCs) as collateral for cash secured financing. Historically, DSCs and SSCs pay out higher premiums than the banking sector’s fixed deposits; often higher than the prevailing inter-bank rate. This greatly reduces the markup costs on cash secured financing, whereas provide the individual with the required short-term financing.
  • Premature cancellation of fixed deposits; be it term deposits or savings certificates, carry fixed penalties and often reduction in profit payouts. If an individual requires liquidity in the short run, cancelling existing fixed deposits would result in higher costs as compared to availing cash secured financing for immediate use.
  • Similar to a cash-line, cash secured financing only charges markup on the utilized amount. This reduces markup costs, especially if regular payments are made to reduce the outstanding balance.

If an individual is maintaining sufficient savings, invested in high-return products, short term liquidity requirements such as educational costs, travel expenses, wedding events, can be financed through cash secured financing. This facility allows an individual to maintain his savings volume, prevent penalty charges or loss of profits in the event of early cancellation and yet maintain access to funds on an immediate basis. We, at MyBankersOnline, recommend cash secured financing for all individuals seeking short-term liquidity, yet unwilling to break into existing investments. This product is specially recommended for financing a child’s higher education as it leaves sufficient cushion to repay the outstanding amount at lower mark-up rates and self-prescribed timelines.


By Saad Niaz


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