When you need quick funds for an emergency, a business opportunity, or a big-ticket expense, you might think of selling your investments like shares, mutual funds, or bonds. But what if you could keep your investments and still get the money you need? That’s where a Loan Against Securities (LAS) comes in.
This financial tool lets you borrow money by pledging your securities as collateral, ensuring you don’t have to part with your hard-earned investments. In this article, we’ll explore five compelling reasons why opting for a Loan Against Securities is often better than selling them outright.
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1. You Keep Ownership of Your Investments
Selling your securities means giving up ownership, along with any potential growth they might bring in the future. When you take a Loan Against Securities, you retain ownership while using them as collateral.
- Why it matters:
Imagine you own shares of a company currently priced at ?500 each. If you sell them now and the price doubles in the next year, you miss out on that profit. By taking a loan instead, you can unlock funds without losing the opportunity for future gains. - Example:
Suppose you pledge shares worth ?10 lakh to get a loan of ?5 lakh. As the value of your shares grows, so does your wealth—even while the loan is active.
2. Lower Interest Rates Compared to Other Loans
Loans Against Securities typically come with lower interest rates compared to other unsecured loans. This is because your investments act as collateral, reducing the risk for lenders.
- Average interest rates:
- Loan Against Securities: 8.5%-12%
- How this helps:
Lower interest rates mean less financial strain. This makes LAS a more cost-effective way to raise funds. - Pro Tip:
The type of securities you pledge can impact the interest rate. Blue-chip shares or government bonds often result in more favourable terms.
3. Instant Liquidity Without Selling
Emergencies don’t wait, and sometimes you need funds at short notice. Selling securities might not always be the quickest option, especially if market conditions aren’t favourable. A Loan Against Securities provides a faster alternative.
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- Speed of Disbursement:
Once your pledged securities are verified, the lien is created, and an Overdraft is approved and disbursed quickly. - No Need to Time the Market:
Selling investments during a market downturn could lead to losses. LAS ensures you get liquidity without being forced to sell at a low price.
4. Flexible Repayment Options
Loans Against Securities are known for their flexible repayment terms, which can be customised to suit your financial situation.
- Key Features:
- Pay interest only: Many lenders allow you to pay only the interest at the due date and repay the principal whenever you have surplus funds or at your convenience..
- Prepayment flexibility: You can prepay the loan partially or fully without hefty penalties, depending on the lender.
- Why this is advantageous:
If you’re expecting a lump sum in the near future—like a bonus or business income—you can repay the loan early without worrying about EMIs eating into your monthly budget. - Example:
Ramesh took a ?5 lakh Loan Against Mutual Funds. He took a loan to expand his business, paying only the interest each month and clearing the principal after receiving a major client payment six months later.
5. Market-Linked Benefits
LAS gives you an added advantage with the growth of your securities value even when they are pledged.
- Market-Linked Benefits:
In case your pledged shares or mutual funds increase in value, the lender may give you additional credit or adjust the loan-to-value ratio, providing more financial cushion.
When is a Loan Against Securities Ideal?
While LAS offers several benefits, it’s not the best choice for every situation. Here are scenarios where it makes sense:
- For Short-Term Needs:
If you need funds for a short period (e.g., 6 months to 1 year), LAS is a smart choice due to its lower interest and flexibility. - To Avoid Liquidating Long-Term Investments:
Selling securities might disrupt your long-term financial goals. LAS allows you to stay on track while meeting immediate needs. - During Market Lows:
Selling securities in a bearish market could lock in losses. Pledging them ensures you can ride out the downturn and benefit when the market recovers. - For Business Opportunities:
Entrepreneurs often use LAS to fund working capital or expand their businesses without disturbing their personal savings.
How to Apply for a Loan Against Securities
Getting started with LAS is straightforward.
Step 1: Choose a Lender
Compare banks and NBFCs (non-banking financial companies) to find the best interest rates, processing fees, and repayment terms. Major banks such as ICICI Bank offer attractive rates on availing a Loan Against Securities.
Step 2: Check Eligibility
Most lenders require:
- KYC documents (Aadhaar, PAN, etc.)
- A Demat account for shares or mutual funds.
- A minimum value of pledged securities (varies by lender).
Step 3: Submit Securities
Pledge your securities, which will remain in the lender’s custody or lien-marked in your Demat account.
Step 4: Receive Funds
Once approved, the loan amount is disbursed directly to your account.
Are There Any Risks Involved?
While LAS is a powerful financial tool, it’s essential to be aware of the risks:
- Market Volatility:
If the value of your pledged securities falls below a certain level, the lender may ask you to provide additional collateral or repay part of the loan. - Repayment Obligations:
Failure to repay on time could result in the sale of your securities to recover the loan amount. - Limited Loan Amount:
You can only borrow up to a certain percentage of your securities’ value, usually 50-80% depending upon the nature of the securities pledged..
Conclusion: Why Choose a Loan Against Securities?
A Loan Against Securities strikes the perfect balance between liquidity and long-term wealth preservation. Instead of selling your investments during unfavourable market conditions, you can leverage their value to meet immediate financial needs—all while retaining ownership and benefiting from market growth.
Whether you’re a seasoned investor or someone just starting, LAS offers flexibility, cost-effectiveness, and convenience, making it a smarter choice than selling securities.
If you’re considering this option, now is the time to explore your securities’ potential and unlock their value with a Loan Against Securities.