Loan Against Securities (LAS): Meaning, Interest Rates & Types (2024)

Loan against securities is a type of loan where borrowers can pledge their securities such as equities, mutual funds, fixed-income securities, ETFs, and insurance policies as collateral to obtain funds from a lender.

This article provides a comprehensive overview of loan against securities, including its definition, benefits, and risks. We will cover LAS eligibility criteria, fees, charges, and the types of securities available for pledging. So, let’s dive in and explore the world of loan against securities meaning.

What is Loan Against Securities (LAS)?

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. LAS allows individuals to leverage their investments and receive immediate liquidity without having to sell their securities. 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. The determination of the loan amount is based on various factors such as the type of security, creditworthiness of the borrower, and prevailing stock market conditions.

The concept of LAS is gaining popularity as it offers a more flexible and cost-effective alternative to traditional forms of loans such as personal loans, business loans, or credit cards. LAS is especially beneficial for investors who have 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 is generally lower than other forms of unsecured loans, making it an attractive option for borrowers looking to reduce their borrowing costs.

What is the Difference Between Loan Against Securities and Other Types of Loans?

Loan Against
Securities
Personal LoanHome Loan Business LoanPurpose Repayment
Tenure
Loan TypeSecurities such as stocks, mutual funds, bonds, etc.Lower than any other unsecured loansA percentage of the market value of pledged securitiesEmergencies, opportunities, working capital, debt consolidation, etc.Flexible, up to the tenure of the loan
CollateralNoneHigher than LASUp to a certain limit based on income and credit scorePersonal expenses such as weddings, vacations, medical emergencies, etc.Typically 1 to 5 years
Interest RatesPropertyLower than personal loans but higher than LASUp to a certain percentage of the property valuePurchase or construction of a home or propertyUp to 30 years
Business LoanBusiness assets such as inventory, equipment, accounts receivable, etc.Higher than LASDepends on the type of business and its financialsWorking capital, expansion, purchase of assets, etc.Typically 1 to 5 years
Credit CardNoneHigher than LASBased on the credit limit assigned by the issuerPersonal expenses such as shopping, dining, travel, etc.Typically a minimum monthly payment

What are The Eligibility Criteria For Loan Against Securities?

Eligibility criteria for Loan Against Securities (LAS) typically vary from lender to lender. Still, the following are some of the general requirements:

  • The borrower must be an Indian citizen or resident
  • The borrower must be at least 18 years old
  • The borrower must possess a Demat account and eligible securities of sufficient quantity to serve as collateral for pledging
  • The borrower must have a good credit score and repayment history
  • The borrower must have a stable source of income to demonstrate repayment capacity
  • The value of the securities pledged should meet the minimum requirements of the lender.

What are the Fees or Charges Required for LAS?

In terms of fees and charges, LAS typically involves the following costs:

  • Interest Rate: The loan against securities interest rate is usually lower than that of other forms of unsecured loans. It may vary from lender to lender based on various factors such as the type of security, creditworthiness of the borrower, and prevailing market conditions.
  • Processing Fees: Lenders may charge a processing fee ranging from 0.5% to 1% of the loan amount to cover the cost of verifying and processing the loan application.
  • Prepayment Charges: Some lenders may charge prepayment penalties if the borrower repays the loan before the due date. However, many lenders have waived this charge recently to attract more customers.
  • Other Charges: Other miscellaneous charges such as stamp duty, legal fees, valuation fees, and insurance may also apply depending on the lender and the amount of the loan.

It is important to carefully review and compare the fees and charges of different lenders before applying for a LAS to ensure that you are getting the best deal.

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 loan amount is determined by the cumulative value of these securities. 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. 500,000, and the borrower withdraws Rs. 50,000 for six months, they will only pay interest on the Rs. 50,000 during that period. Repayment terms offer flexibility, allowing for combined interest and principal payments or interest-only payments with 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.

Which Securities Can Borrowers Pledge as Collateral for Loan Against Securities?

Various types of approved securities can be pledged as collateral for a Loans Against Securities (LAS), including,

  • 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. Loan Against Mutual funds can provide a diversified portfolio and steady returns, but their value can be affected by market fluctuations.
  • 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 Policies: Some lenders also accept insurance policies such as endowment policies, money-back policies, or ULIPs as collateral for LAS.

What are the Benefits and Risks Associated With Loan Against Securities?

Each type of security comes with its own benefits and risks. For example, equities offer the potential for high returns but can also be highly volatile. Fixed-income securities are less risky but may offer lower returns. Mutual funds and ETFs can provide diversification but may be subject to market fluctuations.

Before pledging any security for LAS, it is essential to understand the risks associated with it and to evaluate whether it is suitable for your financial goals and risk tolerance. It is also important to work with a reputable lender and to carefully review the terms and conditions of the loan agreement.

Factors that May Affect the Loan Against Securities Interest Rates Include

  • Type of Security: The interest rate may vary depending on the type of security pledged. For example, equities may have a higher interest rate than fixed-income securities.
  • Creditworthiness of the Borrower: The loan against security interest rate may be lower for borrowers with a good credit score and repayment history.
  • Loan Amount: Larger loan amounts may be associated with lower interest rates.
  • Loan Tenure: Longer loan tenures may be associated with higher interest rates.
  • Prevailing Market Conditions: Prevailing market conditions, such as inflation, interest rate changes, and economic trends, may influence the loan against securities rate of interest.

Loan Against Shares and Securities Eligibility

In addition to the eligibility criteria, the borrower must also provide certain documents when applying for a loan against assets, shares & mutual funds. These documents may include:

  • Proof of Identity: Aadhaar card, PAN card, passport, or voter ID card.
  • Proof of Address: Utility bill, rental agreement, or Aadhaar card.
  • Proof of Ownership of Shares: Demat account statement, share certificate, or broker’s contract note.
  • Income Proof: Salary slip, income tax returns, or bank statements.

What is the Process For Applying For A Loan?

The process for applying for a loan against bonds or shares typically involves the following steps:

  • Submitting an Application Form: The borrower must submit an application form along with the required documents to the lender.
  • Valuation of Shares: The lender will value the pledge shares to determine the loan amount.
  • Execution of Loan Agreement: The borrower and lender will execute a loan agreement once they determine the loan amount.
  • Pledging of Shares: The borrower will pledge the shares online as collateral for the loan.
  • Disbursem*nt of Funds: The lender will disburse the loan amount to the borrower’s bank account.

Applying Online or Offline?

Online Approach

  • Borrowers can apply for a loan against securities through an online approach.
  • They can visit the lender’s website and fill out an online application form.
  • Required details include the borrower’s name, contact information, PAN number, and details of the stocks to be pledged as collateral for the loan on stocks.
  • You may need additional documents to verify the borrower’s identity and stock ownership.
  • The lender reviews the application and informs the borrower of the loan amount and interest rate.
  • If the borrower agrees to the terms, they can sign the agreement and submit the required documents online.
  • Once the lender receives the pledged stocks, they will disburse the loan amount to the borrower’s bank account.

Offline Approach

  • Offline approach for applying for a loan against stocks
  • Visit the lender’s branch office
  • Fill out a physical application form
  • Provide details such as name, contact information, PAN number, and stock details
  • Submit required documents for identity and stock ownership verification
  • The lender reviews the application and informs the borrower of loan amount and interest rate
  • Borrower signs agreement and submits required documents in person
  • The lender disburses the loan amount to the borrower’s bank account after receiving the pledged stocks.

How to Apply for Loan Against Mutual Funds on smallcase?

Apply for a Loan Against Mutual Funds on smallcase effortlessly. Simply follow these steps:

  1. Import & select the mutual funds for collateral.
  2. Add a bank account for receiving funds and monthly interest auto-debit.
  3. Pledge your holdings with the lender.
  4. Sign the loan agreement online.
  5. Check your eligibility today; download the app to learn more.

Overall, borrowers can choose the approach that is most convenient for them based on their preferences and requirements. However, it is important to carefully review the terms and conditions of the loan and compare them with other options before making a decision.

Understanding the Loan Against Share Maximum Limit

For a loan against share, the maximum limit depends on a variety of factors, including the type and market value of the shares being pledged, the borrower’s creditworthiness, and the lender’s policies. Generally, lenders offer loans against shares up to a certain percentage of the market value of the shares, usually ranging from 50% to 75%.

For example, if a borrower pledges shares with a market value of Rs. 10 lakhs, the lender may offer a loan amount of up to Rs. 7.5 lakhs at a maximum loan-to-value ratio of 75%. However, the actual maximum limit may vary depending on the lender’s policies and the borrower’s creditworthiness.

The maximum limit for loans against equity shares may also depend on the financial performance and stability of the company whose shares are being pledged. Lenders may be more willing to offer a higher amount in loan for shares of financially strong companies with a good track record.

To be eligible for a loan against equity shares, the borrower must fulfill certain criteria set by the lender. These may include ownership of the shares, a minimum market value of the shares being pledged, and a good credit score.

How to Manage Your Loan Against Securities (LAS)?

Here are two effective ways you may adapt to manage your Loan Against Securities:

Monitoring Market Volatility

To effectively manage a Loan Against Securities (LAS), it’s crucial to keep a close watch on market fluctuations. These shifts can significantly impact the value of pledged assets, potentially leading to heightened security requirements. It’s advisable to refrain from borrowing against securities when market prices are expected to decline.

Selecting a Trustworthy Lending Partner

When opting for LAS, the choice of a reputable lender is paramount. Look for a lending institution that adheres to fair practice codes, ensuring fairness, transparency, and ethical conduct in their lending operations. Meeting the lender’s specific eligibility criteria is a prerequisite for accessing LAS, which may include requirements like maintaining an account and adhering to minimum balance stipulations. Carefully consider your options and choose a lender that aligns with your financial objectives and requirements.

Advantages of Taking a Loan Against Securities Compared to Other Types of Loans

Taking a loan against securities can offer several advantages over other types of loans. One of the main benefits is lower interest rates compared to unsecured loans such as personal loans. Since the pledged securities secure the loan, lenders may offer lower interest rates.

Another advantage of taking a loan against securities is that there is no need to sell the securities, which can help borrowers avoid potential losses or tax implications. Borrowers can continue to benefit from any potential gains or dividends from their securities.

What Are The Advantages of Loan Against Securities?

Here are a few advantages of taking a loan against collateral:

  1. Access funds without selling your investments, enabling their continued growth.
  2. Enjoy cost-effective financing with lower interest rates compared to unsecured loans.
  3. Experience a streamlined process with rapid approval and fund disbursem*nt.
  4. Gain flexibility in repayment, allowing borrowers to choose full or partial repayment at their convenience, ideal for those with irregular income or installment needs.

Considerations Before Taking a Loan Against Securities

Here are a few considerations one should make before going for Loan against Securities:

  • The lender can sell your pledged securities to recover the outstanding amount if you don’t repay the loan.
  • Even with lower interest rates, you’ll accrue interest expenses on the loan.
  • Make sure you meet the lender’s eligibility criteria, as not all securities or individuals may qualify for this loan.

What are Some Real-Life Examples of LAS?

Real-life examples of how loan against securities has helped borrowers include cases where borrowers were able to finance business expansion, pay off high-interest debt, or meet unexpected expenses without having to sell their securities. By pledging their securities as collateral, borrowers were able to get access to funds at a lower interest rate and without having to sell their investments.

Overall, the benefits of loan against security can offer borrowers compared to other types of loans, including lower interest rates, no need to sell securities, and flexibility in repayment. However, borrowers should also be aware of the risks associated with pledging securities as collateral and carefully consider the terms and conditions of the loan before taking one.

What is Loan Against Stocks?

A loan against stocks is a type of loan where the borrower pledges their stocks as collateral in exchange for funds from the lender. The amount of the loan depends on the value of the pledged stocks, and the lender may hold the stocks as collateral until the borrower repays the loan.

Compared to other types of securities, loans against stocks may offer lower interest rates since stocks are generally considered more liquid and less volatile than other types of securities. However, the maximum loan amount may also be lower since stocks can be subject to market fluctuations and may not hold their value over time.

To be eligible for a loan against stocks, the borrower must typically own the stocks outright and have a sufficient number of shares to pledge as collateral. The lender may also consider factors such as the market value of the stocks, the borrower’s credit score, and the purpose of the loan.

The maximum limit for loans against stocks depends on several factors, including the value of the pledged stocks, the borrower’s creditworthiness, and the lender’s policies. Generally, the maximum limit for loans against stocks can range from 50% to 70% of the market value of the pledged stocks.

Loan against stocks can be a useful option for borrowers who need access to funds but do not want to sell their stocks. However, lenders should also make borrowers aware of the risks associated with pledging stocks as collateral and carefully explain the terms and conditions of the loan before providing one.

To Wrap It Up…

In summary, Loan Against Securities (LAS) is a type of loan that allows individuals to pledge their securities such as stocks, mutual funds, bonds, and other financial assets as collateral to obtain a loan from a lender. Borrowers can typically avail a loan amount under LAS as a percentage of the market value of the pledged securities. LAS is gaining popularity as it offers a more flexible and cost-effective alternative to traditional forms of loans.

The interest rates on LAS are generally lower than other forms of unsecured loans, making it an attractive option for borrowers looking to reduce their borrowing costs. Eligibility criteria for loan against securities typically include having Indian citizenship or residency, a Demat account, a sufficient quantity of eligible securities, a good credit score, and a stable source of income. Fees and charges for loan against securities include interest rates, processing fees, prepayment charges, and other miscellaneous charges. You can pledge various types of securities as collateral for a loan on securities, including equities, mutual funds, fixed-income securities, ETFs, and insurance policies. However, each type of security comes with its own benefits and risks, and it is essential to understand them before pledging any security for loan against securities.

FAQs

1. Is securities a loan?

No, securities are not a loan. However, securities can be used as collateral for a loan, such as a loan against securities.

2. Who borrows securities?

Securities are typically borrowed by short sellers, institutional investors, and market makers who need to fulfil their contractual obligations or hedge their positions.

3. Do you need a DEMAT account for loan against securities?

Yes, a Demat account is required for a loan against securities. The borrower needs to pledge the securities held in the Demat account as collateral for the loan.

4. How much loan amount can I get against my securities?

The loan amount typically depends on the market value of the pledged securities, and the lender may offer a percentage of that value as the loan amount.

5. Is a loan against securities secured or unsecured?

A loan against securities is a secured loan as the borrower pledges their securities as collateral to the lender.

Disclaimer: The content in this article is purely the author’s personal opinion and is for informational and educational purposes only. It should not be construed as professional financial advice and nor be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.

The views and opinions stated in the content belong to the author. smallcase Technologies Private Limited does not uphold nor promote any of the views/opinions.

All About Loan Against Securities & Loan Against Mutual Funds on smallcase –

smallcase offers quick and easy disbursem*nt of loans against securities ( LAMF), all about eligibility, documents, features and benefits of Loan against mutual funds and the process for applying for loan is just one click away –

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As an expert in the field of loans against securities, I bring in-depth knowledge and practical experience to shed light on the concepts discussed in the provided article.

Loan Against Securities (LAS) Overview: A Loan Against Securities involves pledging securities like equities, mutual funds, fixed-income securities, ETFs, and insurance policies as collateral to secure funds from a lender. This concept is gaining popularity due to its flexibility and cost-effectiveness compared to traditional loans.

LAS Eligibility Criteria:

  • Indian citizenship or residency
  • Minimum age of 18
  • Demat account with eligible securities
  • Good credit score and repayment history
  • Stable source of income
  • Securities' value meeting the lender's requirements

Fees and Charges for LAS:

  • Interest Rate: Generally lower than unsecured loans, varies based on factors like security type and creditworthiness.
  • Processing Fees: Ranges from 0.5% to 1% of the loan amount.
  • Prepayment Charges: May apply if the borrower repays before the due date.
  • Other Charges: Stamp duty, legal fees, valuation fees, and insurance charges may apply.

How LAS Works: Banks and NBFCs offer LAS as secured loans backed by eligible securities. Borrowers pledge securities, and the loan amount is determined based on the cumulative value. Borrowers pay interest only on the withdrawn amount during the usage period, with flexible repayment options.

Securities Pledgeable for LAS:

  • Equities: Highly liquid but volatile.
  • Mutual Funds: Provide diversification and steady returns.
  • Fixed-Income Securities: Less risky with fixed interest rates.
  • ETFs: Diversification, low costs, and liquidity.
  • Insurance Policies: Some lenders accept endowment, money-back, or ULIPs.

Benefits and Risks Associated: Benefits include immediate liquidity without selling securities and lower interest rates. Risks involve market fluctuations and understanding the suitability of pledged securities for financial goals.

Factors Affecting LAS Interest Rates:

  • Type of Security
  • Creditworthiness of the Borrower
  • Loan Amount
  • Loan Tenure
  • Prevailing Market Conditions

Loan Application Process: Involves submitting an application form, valuation of pledged shares, execution of a loan agreement, pledging of shares, and disbursem*nt of funds.

Online vs. Offline Application: Borrowers can apply online through the lender's website or visit the branch for an offline application. Both approaches have their merits, and careful consideration is essential.

Loan Against Share Maximum Limit: The maximum limit depends on factors like the type and market value of shares, borrower's creditworthiness, and lender policies. Generally ranges from 50% to 75% of the market value.

Managing LAS: Monitoring market volatility and selecting a trustworthy lending partner are crucial for effective LAS management.

Advantages of LAS Compared to Other Loans: Lower interest rates, no need to sell securities, and flexibility in repayment.

Considerations Before Taking LAS: Awareness that pledged securities may be sold if the loan is not repaid, accruing interest expenses, and meeting lender eligibility criteria.

Real-Life Examples of LAS: Instances where borrowers funded business expansion, paid off debt, or handled unexpected expenses without selling securities.

Loan Against Stocks: Similar to LAS but specifically involving stocks as collateral. Lower interest rates but subject to market fluctuations.

In conclusion, Loan Against Securities offers a versatile and cost-effective financing option for individuals with a substantial securities portfolio. Understanding the intricacies and risks involved is crucial for informed decision-making.

Loan Against Securities (LAS): Meaning, Interest Rates & Types (2024)

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