What is Loan Against Securities? Meaning, Benefits & How It Works
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Need funding for business expenses? Or maybe, you need to pay for your (or your child’s) education. While selling your investments may make sense in the short run, it may not be a good idea from a future point of view. That’s where loan against securities or LAS comes in.
With LAS, you get quick liquidity without liquidating your holdings. That means no capital gains tax and you won’t miss out on future market gains.
So, in this blog, I’ll explain what exactly LAS is. Plus, you’ll get to know how you can get loans against securities with ease. Let’s begin.
What is Loan Against Securities?
A loan against securities is a secured borrowing facility where you pledge your existing investments as collateral to avail funds. These securities can be anything from stocks and mutual funds to bonds or insurance policies.
Financial institutions and NBFCs offer around 50-80% of the securities’ market value, depending on their risk assessment. And since this loan is backed by collateral, the interest rates are lower compared to unsecured business loans.
However, let’s say the value of your (collateral) securities drops significantly. Then lenders may issue a margin call. In that case, you will need to offer additional collateral or partial repayment. So you see, LAS is flexible yet risk-free, for both parties, in case of short-term needs.
How Does Loan Against Securities Work?
In LAS, existing investments work as collateral for loans. Here’s how it works:
- Pledge Your Securities: You offer your stocks, mutual funds, bonds, or insurance policies as security to a lender (banks/NBFCs).
- Loan Approval & Disbursement: The lender evaluates your portfolio and sanctions a loan at a lower interest rate than unsecured loans. Loan will typically be 50-80% of the asset’s market value.
- Retain Ownership: Unlike selling investments, you continue holding them and benefit from potential appreciation.
- Repayment Flexibility: You can repay via EMIs or bullet payments, with some lenders allowing interest-only repayments.
- Margin Maintenance: If market fluctuations reduce your collateral value, lenders may ask for additional security (margin call).
Basically, you get short-term liquidity without losing long-term investment gains. But of course, there are market risks and margin calls, which require careful monitoring. So explore our plan for loans against securities and make the call with caution.
Loan Against Securities Compared to Other Common Loans
When you need funds in a crunch, there are several financing options available, each with subtle details.
| Factor | Loan Against Securities (LAS) | Loan Against Property (LAP) | Unsecured Loans | Working Capital Loan | Credit Cards |
|---|---|---|---|---|---|
| Collateral Required | Yes (Stocks, Mutual Funds, Bonds) | Yes (Residential/Commercial Property) | N/A | Sometimes (Depends on Lender) | No |
| Loan-to-Value (LTV) Ratio | 50-80% of security value | 50-70% of property value | N/A | Varies (Often 70-80% of receivables/inventory) | Pre-set credit limit |
| Interest Rate | Lower (8-12% p.a.) | Moderate (9-14% p.a.) | Higher (11-24% p.a.) | Varies (10-18% p.a.) | Very high (over 24% p.a.) |
| Loan Tenure | Short to medium (1-5 years) | Long-term (5-20 years) | Short to medium (1-7 years) | Short-term (3-12 months) | Revolving (No fixed tenure) |
| Processing Time | Fast (1-3 days) | Moderate (5-10 days) | Fast (1-5 days) | Moderate (3-7 days) | Instant (pre-approved) |
| Risks (if any) | Yes (assets liquidated if margins not maintained) | Yes (property seized if default occurs) | No | Depends on terms | No (But high penalties) |
While these figures and comparison are fairly accurate, consult with loan experts like Nihal Fintech to get a better idea of it. We offer loans against property, unsecured loans, and working capital loans, along with loans against securities.
FAQs on Loans Against Securities
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What is the typical Loan-to-Value (LTV) ratio in LAS?
Most lenders will provide about 50-80% of the market value of the collateral. High-volatility stocks may have lower LTV than stable bonds or blue-chip stocks.
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How are interest rates determined?
LAS rates that typically range between 8-12% p.a. are lower than personal loans because these are secured. The rates depend upon the type of security pledged, the assessment of lender risk, and the loan duration.
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Can I still earn dividends/interest on pledged securities?
Yes! You own it, so dividends, interest, and bonuses will still be credited to your account. However, you will not be able to sell the pledged assets until repayment is made on the loan.
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Are there tax benefits with loans against securities?
No direct tax deductions, but interest paid may qualify as a business expense if used for income generation (consult a tax advisor).
Let’s Summarize
A Loan Against Securities (LAS) offers a smart way to unlock liquidity without selling your investments. The interest rates are lower than unsecured loans and there’s a flexibility to retain asset ownership. That’s why it’s a practical solution for short-term funding needs, whether it’s for emergencies, business expenses, or opportunities.
However, it’s not without risks. Market volatility can trigger margin calls, and failing to maintain the required collateral could force liquidation. So assess if you can handle potential market swings and repayment obligations.
And if you want further help with your personal and business expenses, explore our finance options today!
