Taking out a loan against securities or LAS is a lesser-known option than personal loans, business loans, education loans, etc. Loans against securities are an excellent way for an investor to use his securities as collateral to meet any business or personal funding requirements.
In such a loan, securities which you own such as shares, bonds or debentures are placed as collateral. Instead of selling your securities and losing out on future gains, you can use your securities to gain short-term funding to meet your needs. Loan against securities are offered by most financial institutions such as banks and non-banking finance companies. Each financial institution has its list of approved securities, and you can check whether your securities are eligible to be placed as collateral. A few of the ways in which loans against securities stand out against other types of loans are:
Reason Why Loan Against Securities Is A Better Option?
- Allows you To Avail a Large Loan Amount
These loans can be for an amount that is up to eighty per cent of the value of your securities. Suppose you hold securities worth Rs. 10 lacs, then you can avail a loan of Rs. 8 lacs. The exact ratio between loan offered against securities held depends on the financial institution. The loan amount can range from a minimum amount of Rs. 1 lac to a maximum amount in crores. If your securities are held in dematerialised form, then you can get a larger loan amount as compared to the same securities in physical form. Generally, there is no restriction on the end-use of the proceeds of the loan. You can use your loan amount as you see fit, unlike other types of loans.
- Repayment Terms are Flexible
Once you avail this loan, a current account is opened in your name for the sole purpose of disbursal of funds and facilitating repayment. You can withdraw any amount from the account as and when required by you, up to the limit of your loan amount. You can repay any amount as and when it suits your needs without incurring any prepayment charges. The interest which you are charged is based on the amount that you have withdrawn from the account and for the duration that you have withdrawn it. Hence, you only pay for the amount that you use. The interest rate will be lower than the interest rate of a personal loan or a credit card debt.
- Place a Diverse Range of Securities as Collateral
Every financial institution offering loans against securities will have a list of securities which they accept as collateral. This list is diverse, and you will find that you can avail a loan against securities such as shares, mutual funds, bonds, ESOPs, government securities, fixed maturity savings, and so on.
This allows you the option to pick and choose from your portfolio of securities and only place more long-term securities as collateral. You should bear in mind that you cannot sell your securities while they have been placed as collateral for a loan. This means that you may not be able to take advantage of a sudden upsurge in the value of your securities. Hence, you should be careful while picking out the securities you want to place as collateral.
- They are Processed Quickly
You can avail a loan against security in a matter of a couple of days. If you are suddenly faced with an emergency that demands urgent funds, then applying for a loan may be your best option. Most banks will approve your loan within twenty-four hours, and you will receive the funds within a short period after that.
- You Still Get Dividends, and Your Investments Remain Intact
When your shares are placed as collateral, you still retain the ownership rights to those securities. This means that any dividends that are declared on those shares belong to you. Furthermore, taking out such a loan leverages the value of your securities without having to liquidate them. Your investments remain intact, and you can capitalise on future gains while enjoying the funds from the loan today.
A loan against securities may be the best option for you if you have a high-value portfolio and need short-term and flexible financing. Always read the terms and conditions of the loan carefully before committing.