Financial needs can arise without warning, even if you have planned and budgeted well. While selling your investments is an option, it may disrupt your long-term financial goals. In such situations, a loan against securities (LAS) can be an effective solution. It allows you to raise funds without liquidating your investments. However, before opting for it, one needs to understand the pros and cons of a loan against securities.
A Loan Against Securities is a type of secured loan where you pledge your financial securities as collateral to borrow funds from a bank or financial institution. A loan against securities allows borrowers to pledge various securities such as shares, mutual funds, bonds, and insurance policies.
The loan amount sanctioned is a percentage of the current market value of your pledged securities, typically ranging between 50% to 70%. After repaying the loan, the ownership of the securities is returned to the borrower.
Let’s look at an example:
Mr. A requires ₹5 lakh for medical expenses. He decides to take a loan against securities by pledging his shares worth ₹10 lakh. After valuing the shares and verifying the documents, the bank offers Mr. A a loan of 50% of the value of the shares, i.e. ₹5 lakh. After repaying the loan, the ownership of the shares returns to Mr. A.
One of the most significant benefits of LAS is instant access to funds without selling your investments. This ensures that your long-term financial plans remain unaffected. Most lenders disburse LAS within 24–48 hours after pledging the securities.
Since LAS is a secured loan, the interest rates are much lower than unsecured options such as personal loans or credit cards. Typically, loans against securities have an interest rate of 9%-12%.
Even though your securities are pledged, you continue to earn returns from them. For example, you may still receive dividends on shares or experience NAV growth on mutual funds. This growth can offset interest costs and help you generate wealth during the loan tenure.
LAS often functions as an overdraft facility. You can withdraw only the amount you need, and interest is charged only on the amount utilised. Repaying a LAS is convenient and flexible, making it easier to manage your finances.
LAS covers a broad range of eligible securities. You can pledge several securities such as equities, mutual funds, bonds, and insurance policies.
LAS is directly linked to the market value of your pledged securities. If their value drops due to market volatility, your lender may ask you to pledge additional securities or repay part of the loan immediately. Lenders may also sell your securities to recover the loan amount.
If you fail to meet repayment obligations, the lender has the right to sell your pledged securities to recover the dues. This could result in losses if your investments are sold during a market downturn.
The loan-to-value (LTV) ratio for LAS is capped between 50% and 70% depending on the security type and the lender’s policies. This limits the amount of money you can borrow.
While LAS covers multiple instruments, not all securities qualify. For example, tax-saving equity-linked savings schemes (ELSS) under the three-year lock-in period cannot be pledged. Similarly, thinly traded or illiquid stocks may not be accepted by lenders.
LAS may involve processing fees, pledge creation charges, annual renewal fees, and other hidden costs. These charges can add up and can make a LAS an expensive way to borrow money. It is important to review all fees before applying.
LAS is generally cheaper and faster to avail compared to a personal loan. It does not require income proof or a high credit score in many cases since it is backed by collateral. Personal loans, however, can offer longer tenures and do not depend on market fluctuations. If you do not hold eligible securities or want fixed EMIs over a longer term, a personal loan may be more suitable.
A loan against mutual funds is a type of LAS, but limited to only mutual fund units. LAS provides more flexibility as you can pledge a mix of shares, bonds, and other securities. On the other hand, mutual fund loans are simpler to process and often have slightly higher LTVs on debt funds. Choose LAS if you have a diversified portfolio, and LAMF if your holdings are primarily in mutual funds.
You can consider LAS when you need short-term liquidity without disturbing your long-term investments. It is an ideal option when you want to stay invested and borrow money without selling your investments. However, if markets are volatile or your risk tolerance is low, LAS may not be the best choice, as falling asset values can lead to margin calls.
BILLIONBRAINS GARAGE VENTURES LIMITED
Vaishnavi Tech Park, South Tower,
3rd Floor, Survey No.16/1 and 17/2,
Ambalipura Village, Varthur Hobli,
Bellandur, Bangalore, Bangalore South,
Karnataka, India, 560103
CIN: U72900KA2018PLC109343
