When it comes to meeting short-term financial needs, selling your investments is not always the best solution. A Loan Against Securities (LAS) offers a smarter alternative, allowing you to unlock the value of your securities while continuing to benefit from potential market growth. With competitive loans against securities interest rates, flexible repayment options, and quick disbursal, this financial product has gained popularity among investors and individuals with immediate funding requirements.
In this article, we’ll explore the key advantages of taking a loan against securities and how it can be a strategic choice for your short-term financial goals.
1. What is a Loan Against Securities?
A Loan Against Securities is a secured loan that allows you to pledge your equity shares, mutual funds, bonds, SGB or other securities as collateral to borrow money. The loan amount depends on the market value of your pledged securities and the lender’s margin requirements.
Key Features of LAS
- Loans are offered as an overdraft.
- Interest is charged only on the utilised amount for the utilised tenure..
- Your investments remain intact, and you continue to earn dividends or interest.
2. Top Advantages of Taking a Loan Against Securities
Here are some of the major advantages of taking a Loan Against Securities:
A. Quick Access to Funds
One of the most significant benefits of a Loan Against Securities is the speed of disbursal making it ideal for urgent financial needs.
B. Lower Interest Rates
Compared to unsecured loans like personal loans or credit cards, LAS offers competitive interest rates from leading banks such as ICICI Bank. This makes it a cost-effective borrowing option for short-term needs.
C. Retain Ownership of Securities
Unlike selling your securities to raise funds, LAS allows you to retain ownership of your investments. You can continue to benefit from capital appreciation and dividends during the loan tenure.
D. Flexible Repayment Options
Major lenders such as ICICI Bank offer flexible repayment terms with no pre-payment charges, where you only pay interest on the amount you use for the period you utilise it. This flexibility helps you manage your finances more effectively.
E. Preserve Long-Term Investments
By choosing LAS over liquidating your investments, you avoid disturbing your long-term financial goals. This strategy ensures that your portfolio continues to grow while meeting immediate cash flow needs.
3. When to Consider a Loan Against Securities
Here are a few scenarios where considering taking a Loan Against Securities is an ideal choice.
A. Short-Term Business Needs
For entrepreneurs and small business owners, LAS provides quick funds to manage working capital or address operational challenges without disrupting their financial plans.
B. Personal Emergencies
Unexpected expenses, such as medical emergencies or home repairs, can be handled without selling your investments, thanks to LAS.
C. Debt Consolidation
LAS can also be used to consolidate high-interest debt into a single, lower-interest loan, reducing your overall repayment burden.
4. How Loan Against Securities Works
- Eligibility and Documentation
Most lenders require you to hold eligible securities, such as listed shares, mutual funds, or bonds. Basic KYC documents and proof of ownership of the securities are needed to apply. - Pledging Your Securities
The securities are pledged to the lender as collateral. However, you remain the owner and continue to earn dividends or interest. - Loan Amount Determination
The loan amount is calculated based on the market value of the securities and the lender’s margin requirement, which typically ranges between 50%-80% of the security value, depending upon the type of securities you hold. - Interest Rates and Repayment
Interest is charged only on the amount utilised, and repayment options include bullet payments, EMIs, or interest-only payments for overdraft facilities.
5. How to Use a Loan Against Securities Effectively
A. Compare Interest Rates
Different lenders offer varying interest rates and terms. Look for lenders that provide competitive loans against securities interest rates to minimise your borrowing costs.
B. Use Funds Strategically
While LAS offers flexibility, it’s crucial to use the funds for productive purposes or emergencies to maximise the value of this loan.
C. Monitor Your Securities
Since the loan is linked to the market value of your securities, a sharp decline in market prices could trigger a margin call. Regularly monitor your investments to avoid such situations.
D. Prepay When Possible
If you receive surplus funds during the loan tenure, consider prepaying to reduce your interest burden and close the loan early.
6. Factors to Consider Before Applying for LAS
A. Market Volatility
The value of pledged securities is subject to market fluctuations, which may impact your loan eligibility or result in margin calls.
B. Processing Fees and Charges
Understand the processing fees, documentation charges, and other costs involved in obtaining LAS.
C. Trusted Lenders
Opt for reliable financial institutions, such as ICICI Bank, known for their seamless LAS process, competitive interest rates, and transparent terms.
7. LAS vs. Other Financing Options
Parameter | Loan Against Securities | Personal Loan | Credit Card |
Interest Rates | Lower (8%-12%) | Higher (10%-20%) | Very High (30%-40%) |
Collateral Requirement | Yes | No | No |
Loan Amount | Depends on pledged securities | Limited based on income | Limited based on credit limit |
Ownership of Securities | Retained | Not applicable | Not applicable |
8. Common Myths About Loans Against Securities
Myth 1: I Lose Ownership of My Securities
Fact: You retain ownership of your securities, including dividend and interest income, while they are pledged as collateral.
Myth 2: It’s Only for High-Net-Worth Individuals
Fact: LAS is available to anyone who owns eligible securities, making it accessible for retail investors as well.
Myth 3: It’s a Risky Financing Option
Fact: While market volatility poses some risks, careful planning and regular monitoring of pledged securities can help mitigate them.
Conclusion
A Loan Against Securities is a versatile and cost-effective financial solution for meeting short-term funding needs without disrupting your long-term investment plans. With competitive loans against securities interest rates, quick approval, and flexible repayment options, it stands out as a smarter alternative to personal loans or credit cards.
By leveraging tools like a Loan Against Securities Calculator available on platforms like ICICI Bank, you can estimate your borrowing capacity and repayment obligations with ease. Whether you need funds for business or emergencies, LAS can help you achieve your goals while retaining the benefits of your investments.