When you need funds quickly but don’t want to liquidate your investments, a Loan Against Securities (LAS) can be a smart and efficient financial solution. Whether it’s for an emergency, a business need, or a short-term goal, LAS allows you to leverage your existing financial assets without giving them up.
In this blog, we’ll walk you through what a loan against securities is, how it works, its benefits, risks, and what you should keep in mind before opting for one.
What Is a Loan Against Securities?
A Loan Against Securities is a type of loan where you pledge your financial investments—such as shares, mutual funds, bonds, insurance policies, or government securities—as collateral to borrow money. Instead of selling your assets, you use them as a guarantee for a loan from a bank or a non-banking financial company (NBFC).
The amount you can borrow typically depends on the market value of the securities and the type of asset. Lenders usually offer a loan amount of 50% to 80% of the market value of the pledged security.
How Does It Work?
- Pledge Your Securities: You approach a bank or NBFC and pledge your financial securities.
- Loan Amount is Determined: The lender evaluates the value and volatility of your securities to decide how much you can borrow.
- Loan Disbursement: Once approved, the loan amount is disbursed—usually in the form of an overdraft facility or term loan.
- Repayment: You pay interest only on the amount you utilize. The securities remain in your name, but are marked as pledged with the lender.
Eligible Securities
Common securities that can be pledged include:
- Equity shares (from listed companies)
- Mutual fund units (both debt and equity)
- Bonds and debentures
- Government securities
- National Savings Certificates (NSC)
- Life insurance policies (with a surrender value)
Each lender has its own list of eligible securities, so it’s important to check their specific requirements.
Benefits of Loans Against Securities
- Quick Processing: These loans are generally processed faster than unsecured loans.
- Lower Interest Rates: Since the loan is secured, interest rates are usually lower than personal loans.
- No Need to Liquidate Investments: You continue to earn dividends, bonuses, or interest from your investments.
- Flexible Repayment: Interest is charged only on the amount you use, and repayment options are flexible.
Risks and Considerations
- Market Fluctuations: If the value of your pledged security drops significantly, the lender may ask for additional securities or partial repayment (a margin call).
- Ownership Restrictions: You can’t sell the securities during the loan period unless you repay the loan or replace them with others.
- Loan Limits: The loan value is limited to a certain percentage of the asset’s current market value, which might not meet large financial needs.
When Should You Consider LAS?
LAS is ideal for:
- Business owners needing short-term capital
- Investors looking to avoid selling assets during a market downturn
- Individuals with temporary cash flow mismatches
Final Thoughts
Loans Against Securities are a powerful financial tool if used wisely. They offer liquidity without sacrificing long-term investment goals. However, like all loans, they require careful planning and understanding of the associated risks. Always compare lenders, read the fine print, and ensure your repayment capacity before pledging any asset.
