WHAT IS A LOAN AGAINST SECURITIES?

Loan Against Securities (LAS) is a type of loan where a borrower pledges their securities, such as stocks, mutual funds, bonds, and other financial assets, as collateral to obtain a loan from a lender. It allows individuals to leverage their investments and receive immediate liquidity without having to sell their securities. The value of the overdraft limit that is advanced against loan against securities is determined on the type of collateral type pledged. The lender determines the loan amount that the borrower can avail under LAS by calculating a percentage of the market value of the pledged securities.

Thus, LAS is gaining popularity as it offers a more flexible and cost-effective alternative to traditional loans such as personal loans, auto loans, or credit cards. LAS is especially beneficial for investors with a substantial portfolio of securities but need immediate cash for emergencies or opportunities. It is also a suitable option for those who do not want to liquidate their securities due to tax implications, market conditions, or sentimental reasons. Additionally, loan against securities interest rates are generally lower than other unsecured loans, making it an attractive option for borrowers looking to reduce their borrowing costs.

Personal loans can be obtained from banks, credit unions, online lenders, and other financial institutions. The interest rate and loan terms offered will depend on factors such as the borrower's credit score, income, and employment status.

HOW DOES LOAN AGAINST SECURITIES WORK?

Banks and NBFCs provide secured loans referred to as Loan Against Securities. These loans are backed by eligible securities such as shares, mutual funds, fixed deposits, and insurance policies. The cumulative value of these securities determines the loan amount. Borrowers can access this overdraft facility by pledging their securities with the financial institution. They are only liable for interest payments on the withdrawn amount for the duration of usage. For example, if the securities are valued at Rs. 5,00,000, and the borrower withdraws Rs. 50,000 for six months, they will only pay interest on the utilised amount, i.e. Rs. 50,000. Repayment terms offer flexibility, allowing for combined interest and principal payments or interest-only payments with a principal offset against collateral. It’s also possible to offset the entire loan against the underlying security. In certain cases, the loan can be structured as a demand loan, which the financial institution may settle after a set period, usually up to 24 months.

EXMAPLES OF SECURITIES THAT CAN BE PLEDGED TO:

• EQUITIES: Equities have high market value and high liquidity, making them one of the most commonly used securities for LAS. However, equities refer to stocks or shares of companies listed on the stock exchange, and they can experience volatility in their value, resulting in fluctuations in the loan amount.


• MUTUAL FUNDS: These are investment funds that pool money from multiple investors and invest in stocks, bonds, or other assets. You can opt for a loan against mutual funds that offers you the opportunity to receive immediate liquidity against the pledged mutual fund units.


• FIXED-INCOME SECURITIES: These are investments that pay a fixed interest rate, such as bonds, debentures, and fixed deposits. They are considered less risky than equities but may offer lower returns.


• EXCHANGE-TRADED FUNDS (ETFs): These are a type of investment fund that tracks a basket of assets such as stocks or commodities and trades like a stock on an exchange. ETFs offer diversification, low costs, and liquidity, but their value can be volatile.


• INSURANCE POLICES: Some lenders also accept insurance polices such as endowment polices or money-back policies as collateral for LAS.

PLEASE NOTE: It's essential to consider the terms and conditions of a loan before accepting it, including the interest rate, repayment period, and fees.

Personal Loan Eligibility Criteria

While the eligibility criteria for Loan Against Securities typically var from lender to lender. Still, the following are some of the general requirements:

• Age: At least 18 years old
• Proof of Identity: Aadhaar Card, PAN Card, Passport, or Voter ID card.
• Proof Of Income: Salary Slips, Income Tax Returns or Bank Statements
• Credit Score: Preferably 750 and above as having higher credit scores improve chances of loan approval
• Proof of Adresss: Utility Bill, Rental Agreement or Aadhaar Card.
• Proof of Ownership of Shares: Demat Account Statements, Share certificate, or Broker's contract note.