If you’ve ever been in financial distress, you know how life-saving a personal loan can be. Most of us seek simple solutions to our financial problems that are easily accessible, involve minimal documentation, and offer competitive rates.
This article will assist you in delving deeper into the loan against security (LAS) facility to cut the best deal when you require one.
What are Loans against Securities?
A loan against Securities (LAS) is a type of secured personal loan in which you pledge your financial securities to the lender as collateral against the loan amount. This facility enables you to meet your financial obligations without selling your securities. Instead, you hold ownership of the securities and any benefits such as bonuses, dividends, or interest.
The lender determines your eligible loan amount based on the total value of the securities pledged. The interest rate varies from lender to lender, ranging from 7- 17%, and it also depends on your chosen repayment period.
Securities eligible to be pledged in Loan Against Securities
Different lenders refer to their list of approved securities before sanctioning a loan against security. The different financial securities accepted by Banks are-
- Mutual Funds
- Life Insurance Policy- ULIPs/ Endowment (excluding Term insurance policies)
- Demat Equity Shares
- National Savings Certificate (NSC) or Kisan Vikas Patra (KVP)
- UTI Bonds/ NABARD bonds/ Government Bonds
- Fixed Deposits
- Fixed Maturity Plans (FMP)
- Non-convertible Debentures
Interest on Loan against Securities
In general, the interest rates charged on loan against securities largely depends on the factors like-
- Repayment Tenure
- Nature of security
- Loan spread over Repo Rate
The below table indicates the interest rate of loans against securities of some leading Banks in India
|Financial Institution||Interest Rate||Max. Loan Offered|
|State Bank of India||10.30% to 10.80%||Rs. 20 Lacs|
|HDFC Bank||11.85% – 17.02%||Rs. 20 Lacs|
|Bank of Baroda||9.60% – 10.95%||Rs. 20 Lacs|
|ICICI Bank||7% – 11%||Rs. 20 Lacs|
Features of Loan Against Securities
- Fast Processing and instant disbursal of loans due to the transition to automated systems
- Because the loan is personal, you are not obligated to explain the end-use of funds to the lender. The only restriction is that you may not use these funds for speculation or anti-social activities.
- The loan requires minimal paperwork like your KYC documents and related securities documents you want to pledge.
- You can opt for a cheque Book, ATM Card, and Online Banking facility for your overdraft facility.
- You can use these funds for various purposes like funding your vacation, education, setting up a new business, or Medical emergencies. Moreover, with enhanced liquidity, your investment potential increases manifolds.
Things to Consider while Availing Loan against Securities
For choosing an optimal loan against securities, always discuss the following crucial points before availing loan against securities.
Banks charge loan processing fees to cover administrative costs incurred while processing and sanctioning the loan. These fees vary depending on the financial institution, but they typically range from nil to 2.5% of the loan amount.
These are charges for foreclosing on a loan facility before the lock-in period, or the loan tenure has expired. When you try to save interest by redirecting surplus funds to close your loan account and are charged a pre-closure penalty, this puts a dent in your pocket.
Interest Rate Offered
The interest rate on your loan against security is determined by the spread charged by the financial institution and varies depending on the security. So, inquire discreetly with your lender about interest rates and choose the most competitive one.
Loan Eligibility and Repayment Tenure
Your loan eligibility may change slightly as the loan tenure changes. So, talk to your lender about your repayment plans and loan requirements. Otherwise, you may end up with an expensive or insufficient loan.
Pros and Cons of Loan Against Securities
- Instant deposit of funds into your account without the need to liquidate your hard-earned investments amassed over time.
- Flexible repayment options. In the case of an overdraft facility, you pay interest only on the loan tranche disbursed, not the extended limit.
- Even after pledging securities, the ownership of the securities is retained. As a result, you continue to benefit from the interest/dividends on your investments, which helps to reduce the burden of applied interest on the loan.
- The loan procedure is simple and requires only the basic requirements of KYC documents. You don’t need to submit income proof or a credit score.
- The lender determines the loan-to-value (generally 60-70% of collateral value) in LAS, which may be disadvantageous to borrowers seeking large sums or low-priced stocks.
- Even if the securities’ value falls, the borrower cannot sell them. If your security deteriorates significantly, your lender may reduce your loan limit and require you to repay the principal deficit.
- Most lenders exercise their discretion in securities and accept only stocks/scrips on their official list to maintain the credibility of the securities.
- Interest rates on secured loans, such as housing loans, are much higher.
A holistic approach to evaluating the terms and conditions governing the charges or fees and the interest rate offered is critical to pick the most competitive lender. It will help you negotiate the best deal for you and obtain a loan against security that will meet your short-term liquidity needs without putting an undue financial burden on you.
What is the purpose of a loan against securities?
This facility helps you to meet your financial contingencies. You can pledge your shares, bonds, and insurance policies as collateral.
Can I avail online loan against stocks in physical form?
Yes, but you must get your physical stocks dematerialized first to avail yourself of this online facility.
Which is a better option- availing loan on a credit card or a loan against securities?
Both are personal loans, but a loan against securities is a better option. Because interest rates, pre-closure penalties, and processing fees are higher for a loan on credit cards.