Have you ever found yourself in need of urgent funds but don’t want to sell your investments?
One of the most effective ways to unlock liquidity from your existing assets without liquidating them is through a loan against securities (LAS). This option allows you to borrow money by pledging your investments, such as stocks, bonds, mutual funds, or even life insurance policies.
In this WeCredit blog, we will discuss how loans against securities work, the advantages, the types of securities you can pledge for a loan against securities, and all of the vital things you should know before applying for one.
What is a Loan Against Securities?
Loans against securities are secure loans where one uses financial assets as collateral for borrowing money. Essentially, one is pledging his/her investments to the lender while raising money as a loan.
The amount of the loan is usually determined by the market value of the securities pledged against a loan-to-value (LTV) percentage that determines how much one can borrow.
As an example, if the stocks pledged are worth ₹1 lakh, and the lender has an LTV of 70%, the limit for borrowing will be ₹70,000 against those securities.
How Does a Loan Against Securities Work?
Here’s a step-by-step breakdown of how a loan against securities works:
- Choosing Securities: Securities (stocks, bonds, mutual funds, etc.) chosen to be pledged as collateral have to be selected.
- Loan Application: A loan should be applied for with a bank, financial institution, or NBFC that provides the service. They shall evaluate the market value of your securities.
- Loan Evaluation: The lender analyzes the securities to arrive at the loan amount based on the LTV ratio (normally ranging between 50%-80% depending on asset class).
- Pledge and Disbursal: Once sanctioned, you pledge the securities, and the loan will be disbursed either as a lump sum amount or installments, depending on the terms.
- Repayment: The loan will be repaid as per the agreed schedule. Once the loan is fully repaid, your pledged securities are returned.
Advantages of a Loan Against Securities
- Direct Funding – One of the fundamental benefits of a securities loan is the speedy access to funds. It generally takes much less time than a conventional loan because the lending agency has collateral ready.
- Reduced Interest Rates – The loan secured against assets is usually available to borrowers at lower interest rates than unsecured loans. You can expect competitive rates to be offered as compared to personal loans or credit cards.
- No Need to Liquidate Investments – Rather than selling their investments for immediate cash, the borrower will, in fact, keep his assets for growth and use them as collateral for a loan.
- Flexible Loan Amount – The loan amount is usually linked to the value of the securities, so one can borrow a substantial amount depending on their securities.
- Flexible Terms of Repayment – Many lenders will provide flexible repayment terms for their loans, starting with options for part payment or interest-only payments, depending on the specific terms of the lender.
Disadvantages of a Loan Against Securities
- Risk of Losing Assets – Lenders can liquidate pledged securities to cover the loan amount in case of default. This endangers your investments.
- Market Value Fluctuations – The market value of your pledged securities may fluctuate. If a decline occurs, you may be called upon to pledge further securities or repay a part of the loan to satisfy the corpus ratio.
- Obligation to Repay the Loan – This is an unsecured loan, which means the obligation to repay is still laid upon you within the initial term. Non-repayment can expose the pledged assets to liquidation.
- Other Charges – Some lenders may charge additional fees for the maintenance of pledged securities or for the early repayment of the loan.
Conclusion
Loans against securities rank as an excellent financial tool for many because of their dual advantage of providing immediate access to funds at cheaper interest rates and allowing you to hang on to your investments. This serves those who need liquidity quickly but have other valuable assets they would not like to liquidate.
There is an inherent risk, among the most important being the possible loss of assets upon non-repayment and weigh carefully whether this kind of loan fits your financing need.
When considering a loan against securities, do compare lenders’ terms with regard to the loans offered, as well as the kinds of assets accepted as collateral.
