Common Mistakes in Loan Against Securities Applications

Many individuals might often find themselves in a situation where they need access to funds for contingencies or emergencies. Although there are several types of loans that one can avail, a loan against securities allows a borrower to borrow funds while retaining ownership of their securities and investments. However, borrowers often make common mistakes while diminishing the advantages of a LAS. In this article, we will look at common mistakes in loan against securities and how you can avoid them.

Common Mistakes in Loan Against Securities

Overleveraging or Borrowing Too Much

One of the most common loan against securities mistakes that people make is borrowing more money than they require. While applying for a LAS, it is important to know how much money you require. Borrowing more money than required can increase the interest burden.

Ignoring Hidden Costs and Interest Structure

Not checking the hidden costs and interest structure is one the major errors when applying for LAS. Before availing a loan, it is crucial to understand the rate of interest and how it is charged. Additionally, knowing any hidden costs, fees, and charges is also vital. These costs can pile up and make borrowing expensive.

Read more :Loan Against Securities Eligibility Criteria

Using Highly Volatile or Illiquid Securities as Collateral

Another pitfall of LAS that many borrowers fall into is using securities that are highly volatile or illiquid. Securities that are volatile in nature can see significant fluctuations in the market value which can result in frequent margin calls or forced liquidations. Moreover, illiquid and volatile securities have lower chances of approval and the LTV against such securities is lower as well.

Incorrect or Incomplete Documentation & Inaccurate Data

Mistakes in LAS application form can lead to delays or loan rejections. While filling the application form for a loan against securities, it is essential to ensure that the information that is provided is correct and accurate. Make sure that all the necessary documents are valid and contain the accurate information. Be careful that the folio numbers, security details, and demat account number is correct.

Neglecting Terms, Fine Print, and Default Clauses

Before you apply for a loan against securities, a borrower should carefully read and understand the terms of the loans. Reading the fine print can help borrowers get a better idea of certain clauses, conditions, and costs associated with the loans. Knowing the default clauses is also crucial. Not being aware of the conditions that lead to a default in payments can attract penalties or even result in liquidation.

Failing to Monitor Pledged Securities Post Disbursal

Not monitoring your portfolio and pledged securities after disbursal is one of the common mistakes in loan against securities. Once the loan amount is disbursed, the borrower should regularly monitor the value of the securities. If the value of the securities declines, it may trigger margin calls. On the other hand, an increase in the value of the pledged securities may allow investors to borrow additional funds.

Not Comparing Lenders & Their Policies

When a borrower is planning on availing a LAS, not comparing the different lenders can be a common error. Comparing the policies, costs, and terms of different lenders can help borrowers pick the most cost-effective and suitable option. Certain lenders may also have higher loan limits compared to others which may be a crucial factor while picking a lender.

No Clear Repayment or Exit Plan

Availability of a loan against security can offer several advantages to borrowers. However, not having a clear exit plan or way to repay the principal can cause significant problems. Before borrowing money, it is important to know how and by when you plan to repay the funds. Knowing when to foreclose the loan is also important in planning your finances and investment.

Read more: Loan Against Securities: Pros and Cons

“Self-Check Audit” Before You Submit

Here are some key points you should check for before applying for a LAS:

•       The loan amount is ideal and you are not over-borrowing.
•       The application form has all the correct details. The personal information and security information is accurate and valid.
•       You are aware of the costs, terms, policies, and interest structure
•       You have compared different lenders and their policies
•       You are pledging securities that are stable and not illiquid
•       You understand the default clauses and the lender’s right to liquidation
•       You have a clear plan to repay or exit the loan.