Loan Against Securities – 5 Rules That Makes it a Breeze

Summary

Loan against securities is a unique type of loan where you can use financial assets such as bonds and mutual funds as collateral to avail of loans from a lender. This blog aims to provide you with 5 indispensable guidelines to make the most of this financial tool to ensure a seamless and beneficial borrowing experience. 

You or someone close to you might have faced an emergency or crisis that completely caught them off-guard and left them in need of urgent liquid funds. When faced with such a challenge, people often choose to liquidate their investments such as mutual funds, or take personal loans that have very high interest rates.

But what if you could avoid liquidating your funds and take loans at a lower interest rate? Yes, there is another option and that is to take loans against securities in your demat account – Loan against securities (LAS). Let us understand this better. 

What is a Loan against securities (LAS)?

LAS allows you to use other financial assets such as stocks, mutual funds, bonds, etc., as a liability to avail a loan from a lender. The lender will look at the value of the assets you’ve put up as collateral and calculate it as a percentage of the market value. This calculation also factors in your credibility, risk factors, and the state of the stock market, which helps the lender decide the amount they are willing to lend you.

Top 5 things to keep in mind while applying for LAS

Obtaining a loan against your assets can be a smart financial move, but it comes with its own set of rules. To make the most of this lending option, consider these five essential rules: 

• Choose the right lender or financial institution

First, find a lender that is open to accepting a wide variety of financial assets as security, as this can boost your creditworthiness.  It is also important to note that lenders offer different interest rates, processing rates, and foreclosures. So, find the one that will give you competitive rates. Also, while many banks advertise that they provide larger loan amounts, there's always a catch. These loans are typically contingent on the value of the collateral you provide. Most banks extend loans in the range of 60-80 percent of the loan-to-value amount. Consequently, you might not be able to secure a loan equivalent to the full value of your investment. For instance, if you use mutual fund units worth INR 20 lakh as collateral, your loan approval may fall within the range of INR 16 lakh to 18 lakhs.

• Maximise variety and select the right collaterals

A broader selection of financial assets can enhance your loan application and increase your borrowing potential. Additionally, different securities offer different rates depending on the risks and benefits. So, ensure you choose the right securities while taking LAS. For instance, stocks exhibit higher volatility compared to bonds or insurance policies. When you use stocks as collateral there is a high possibility that the value of these securities could experience fluctuations, and you would have to pledge additional securities to meet margin requirements.

• Consider repayment strategies

Always align your loans with your needs and ability to repay. It’s best to evaluate your loan options and prepare a repayment plan with a financial adviser. On this basis, you can make an informed decision on your loan amount and tenure. Also, remember that loans against securities are more flexible than personal loans so look for a lender that will offer you flexible repayment options tailored to fit your financial situation.

• Keep required documents handy

Requesting a loan against securities involves a straightforward procedure, and the necessary documentation for this loan is similarly uncomplicated and clear-cut. To make your borrowing process seamless, keep all essential documents ready. An LAS requires basic documents for KYC such as ID proof, proof of income, demat account details etc.

• Be wary of hidden charges and fees

In spite of the multitude of benefits that come with a loan against securities (LAS), there's a notable downside to consider – the associated fees. All loans come with charges such as processing fees, annual maintenance fees, and, on occasion, closure fees. However, when opting for loans against securities, there are several extra charges to take into account. To begin with, there's a processing fee, typically ranging from 0.15 percent to 1 percent. Additionally, you may encounter fees for pledging and de-pledging, along with renewal fees or annual maintenance charges that can vary from INR 1000 to INR 10000. Moreover, you might also be subject to fees related to ATM usage, cash deposits or withdrawals, as well as NEFT or RTGS transactions.

Wrapping it up

A loan against securities (LAS) can be particularly beneficial in times of immediate liquidity need, offering a preferable option to liquidating investment holdings. They also typically have lower interest rates than personal loans. However, to ensure a smooth borrowing experience, it is imperative to exercise caution and stay well-informed about the specific rules and guidelines governing this financial arrangement. If you are unsure about any of its aspects, consulting a financial advisor will be the way forward.