In any person’s life, there will be times of financial difficulties when one requires instant access to cash. While personal loans are the most popular financing option for such situations, other options come with lower interest rates. Loan against securities (LAS) is one of them.
These are secured loans where people can use their investments to seek financing from lending institutions. The following sections cover loan against securities and its important details.
Loan Against Securities Explained
Loans against securities are described as secured loans which borrowers can avail of against financial securities like shares, bonds, mutual funds, etc. Banks and NBFCs (Non-Banking Financial Companies) offer a loan of up to 50% of the value of securities if they are equity shares. For bank deposits, lenders may approve a loan of up to 90% of the deposit’s value.
Generally, people apply for such loans to deal with short-term or emergency financial requirements. Some of the most common reasons for which people avail of a loan against securities are listed below:
- Urgent financial requirements like medical treatment
- Requirements for higher education for self/children
- Travelling to a foreign destination
How does a Loan Against Securities?
Banks and NBFCs offer loans against securities that are on their approved list. Before disbursing the loan, they create a lien against these securities. The financial securities which lenders accept as collateral include mutual funds, shares, sovereign gold bonds, insurance policies and fixed deposits. The loan amount is determined by the cash value of the securities.
Generally, lending institutions offer an overdraft facility for loans against securities. Borrowers can withdraw funds easily. Interest is payable only on the funds withdrawn and only for the period for which the borrower has utilised the funds.
Reasons to Opt for a Loan Against Securities
It is time to explore why should people avail of a loan against securities:
While the maximum loan amount varies from one lending institution to another, lenders are willing to provide a significant sum for loans against securities. Certain financial institutions even offer loans up to Rs.100 crores depending on the value of pledged securities.
No Liquidation of Securities
The fact that the securities do not have to get liquidated is an important benefit for long-term investors. By providing securities as collateral, borrowers raise money without liquidating their investments. As a result, their return on investment is not affected.
With the overdraft facility, borrowers get the option of paying only the interest on the withdrawn amount. They can deposit the withdrawn amount at their convenience to restore their credit balance. Moreover, the interest gets calculated only on the amount the person withdraws and not on their total approved limit.
Interest rates of this financing option vary from lender to lender. But it is usually lower when compared to personal loans and credit cards.
No Hidden Costs
Generally, there are no hidden costs associated with loans against securities. Borrowers only must pay processing fees and a few other charges, and these are discussed in detail during the application process.
No Limit on Cash Withdrawal
There is no restriction regarding the withdrawal of cash in this financing option. People can withdraw as much as they want up to the approved loan limit. Borrowers can even withdraw the entire loan amount in cash.
Flexible Repayment Schedule
Borrowers must repay only the interest component as EMI, which is a major benefit. They can repay the principal component at their convenience at any time within the loan tenure.
The combination of these benefits makes a loan against securities an attractive financing option. Therefore, if people face cash crunches but do not wish to liquidate their lucrative investments, they can choose to avail of this loan.
List of Securities Eligible for the Loan
Though the approved securities vary from one lender to another, here is a general list of the types of securities against which lenders offer loans:
- Non-convertible debentures or warrants
- National Savings Certificate or Kisan Vikas Patra
- UTI bonds
- NABARD bonds
- Government securities
- Fixed deposits
- Mutual fund units
- Equity shares
- Insurance policies
- Unit-linked endowment plans
- Conventional Endowment plans (except term policies)
- Income plans
Borrowers must remember that not all financial securities are eligible for this financing option. So, it is highly recommended that potential borrowers check the loan against shares eligibility.
Documents Required to Apply for a Loan Against Securities
The documents required for a LAS vary from one lender to another. But people can keep the following documents ready while submitting their loan application:
- Income Tax Returns (ITR) for the previous 2 years
- Bank statements for the previous 3 months
- Relevant documents related to the securities
- Surrender value report for a loan against insurance policies
- Client master list for applicable Demat accounts, for digitised securities
Read Also: Using Loan Against Securities as a Smart Financing Option: Tips and Tricks
Knowing what a loan against securities is helps people use their investments during financially stressful times. It is a smart way to reach financial goals without liquidating one’s investments. These loans offer the benefits of a high loan amount, flexible repayment options and the ability to earn returns on pledged securities.