Rules to Follow While Applying For Loan Against Securities (LAS)
The need for finances may arrive unannounced, demanding a seamless influx of capital. In such unforeseen circumstances, procuring liquid funds within a short-span can pose a challenge. Typically, individuals are left with two choices: liquidating their long-term investments or resorting to high-interest personal loans.
However, if you aspire to devise financial solutions that preserve your investments, while evading high-interest interest, you can opt for ‘loan against shares and securities.’ In this article, we will explore LAS, how it works and few rules to follow while applying for LAS.
What is Loan Against Securities?
Loan Against Securities (LAS) is a unique financial arrangement where borrowers use their stocks, mutual funds, bonds, and other financial assets as collateral to secure a loan from a lender. LAS provides individuals with the ability to tap into the value of their investments and access immediate cash without the need to sell their securities. The loan against mutual funds feature on smallcase is an example of a LAS.
The lender determines the loan amount granted under LAS. It is calculated as a percentage of the market value of the pledged securities. This calculation considers several factors, including the type of securities, the borrower’s creditworthiness, and the current state of the stock market.
LAS is gaining popularity as it offers a more flexible and cost-effective borrowing option compared to traditional loans like personal loans, business loans, or credit cards. It is particularly advantageous for investors with a substantial portfolio of securities who require quick access to funds for emergencies or opportunities. Additionally, LAS is a suitable choice for those who prefer not to sell their securities due to tax implications, market conditions, or sentimental value. Another appealing aspect is that a loan against securities interest rates are usually lower, compared to other unsecured loans, making it an attractive choice for borrowers looking to minimise borrowing costs.
How Does LAS Work?
Opening a demat account not only grants you access to the world of stock trading but also unlocks the potential for a valuable financial tool: a loan against securities. Here’s a closer look at how this loan functions:
- Similarity to Traditional Loans: A loan against securities in India operates much like any other loan. When you apply, you can secure an amount equivalent to the current value of the shares you hold in your demat account.
- Retaining Share Profits and Benefits: What sets these loans against stock holdings or mutual funds apart is that, as the borrower, you continue to enjoy the perks of your investments. This includes profits, dividends, and bonuses throughout the loan tenure, ensuring you don’t miss out on potential gains.
- Long Term Investment Strategy: If you’ve adopted a long-term investment approach in the stock market, leveraging a loan against your equity holdings can be a strategic move. It allows you to address immediate financial needs without jeopardising your overarching investment goals.
- Fulfilling Shortfall Fund Requirements: These loans against securities serve as a lifeline during financial shortfalls, providing investors with the necessary funds while preserving their long-term wealth-building strategy. It’s a balancing act that caters to both immediate and future financial goals.
Rules to Follow While Applying for LAS
When getting a loan against stocks or other securities, it’s crucial to adhere to certain rules and guidelines to ensure a smooth and advantageous borrowing experience. Here are some key rules to consider while applying for LAS:
Select the Right Lender
It is better to choose your lender carefully, as it can significantly impact your borrowing terms. You can look for a lender that accepts a broad range of financial assets as collateral, as this can enhance your creditworthiness.
Maximise Collateral Variety
Borrowers can utilise a diverse portfolio of financial assets as collateral. A wider range of approved securities can strengthen your loan application and improve your borrowing capacity.
Understand the Loan-to-Value Ratio
It can be beneficial to familiarise yourself with the loan-to-value (LTV) ratio. This ratio determines the maximum loan amount you can obtain based on the value of your securities. It is important to know your lender’s specific LTV requirements.
Choose the Right Securities
You can select eligible securities as collateral and consider their liquidity and market volatility. Due to their stability, blue-chip stocks and government bonds can often be preferred.
Evaluate Flexible Repayment Terms
Since loans against securities are secured, they offer more flexibility than personal loans. Borrowers can seek a lender that offers flexible repayment options tailored to their financial situation. These repayments can strain your finances, making it one of the most important rules to follow while applying for LAS.
Understand Overdraft Terms
It can be beneficial to familiarise yourself with the terms of the overdraft facility, including the approved credit limit. You can ensure that you stay within this loan against shares maximum limit when accessing funds from the overdraft facility.
Beware of Hidden Charges
It can be better to take the time to learn about any hidden charges associated with your loan or overdraft facility. These charges may include maintenance fees, processing fees, and additional interest if the approved limit falls short of the loan amount. Understanding these costs can help you manage your loan efficiently.
Take Note of Documents Required
To ensure a seamless borrowing experience, it’s advisable to have essential documents such as KYC documents, income proof, demat account details, etc., ready. Also, taking note of loan against shares eligibility is a good idea. Different lenders may have varying document requirements, but typically, a loan against securities necessitates only a few basic documents. Once you provide these documents and meet the lender’s specified conditions, your loan can be processed.
How to Take Loan Against Mutual Funds at smallcase?
A loan against your mutual fund investments can also be considered as a loan against securities. Here is how one can apply for a loan against mutual funds through smallcase:
- Log in/download the smallcase app
- Navigate to the ‘More’ tab and select ‘Loan Against Mutual Funds’.
- smallcase will then check your mutual fund holdings and display your maximum eligible loan amount as a credit line
- Click on ‘Apply Now’.
- Import your mutual fund holdings and pledge them based on the loan amount.
- Proceed to confirm your loan amount.
Note: you can choose to take only a part of the max eligible amount (not necessarily the entire amount).
- Enter your bank account details
- Sign the loan agreement.
- You should receive cash in your bank account within 3 hours.
In case it takes longer, you can always reach out to the smallcase support team at mailto:help@smallcase.com.
Things to Consider While Applying for LAS
Here are some things to consider while applying for LAS:
- Check Your Eligibility: You should make sure that you meet the necessary criteria before applying for a loan against securities. Typically, lenders require applicants to be at least 21 years old.
- Pick a Diversification-Friendly Lender: It can be beneficial to choose a lender that accepts a variety of investments, such as mutual funds, IPOs, and insurance policies. Look for flexibility in the types of securities they consider.
- Opt for High Sanction & Low Interest: Many Indian lenders offer loan on shares and assets based on your securities. You can avail a loan against mutual funds investment from ₹25,000 to ₹5,00,00,000 with a loan against mutual funds (LAMF) at smallcase
- Flexible Repayment Terms: You can select a lender offering a repayment tenure tailored to your needs and match the repayment period with the loan amount you’ve taken. The lending period for a smallcase LAMF is 36 months.
To Wrap It Up…
In conclusion, when obtaining a loan against securities, it’s essential to consider these tips. By adhering to these rules, you can borrow within your financial limits, effectively manage risks, and reduce your overall borrowing costs in a seamless manner. Loan Against Mutual Funds (LAMF) via smallcase can also be a smart move in optimising your loan against securities strategy. This feature offers a structured approach to potentially enhance your investment returns. As always, please do your own research and/or consult a financial advisor before making any financial decisions.
Frequently Asked Questions About Rules to Follow When Applying for LAS
The RBI permits using only Group I stocks as collateral for loans exceeding five lakhs in the case of loan against mutual funds or other securities. Group I securities are those that have traded on at least 80% of the days in the preceding six months and rank within the top 1% of stocks with the lowest cost impact.
The loan on stocks or securities process involves:
1. Document collection.
2. Lender selection.
3. Application submission.
4. Pledging eligible securities.
5. Evaluation for loan amount.
6. Loan approval and terms.
7. Disbursement to your account.
8. Timely repayment.
9. Ongoing monitoring of market conditions.
Note: Specific procedures may vary by lender.
To qualify for a loan against bonds or other securities:
1. You must be an Indian citizen.
2. Your age must range from 18 to 65 years.
3. You can be either salaried or self-employed.
4. You must possess a minimum security worth Rs. 50,000.
Note: Different lenders have different eligibility criteria for LAS.
To apply for a securities-backed loan from a lender, you should be an Indian citizen or resident, at least 18 years old, with a demat account and eligible securities as collateral. A positive credit score and repayment history are also essential. As mentioned above, different lenders may have specific eligibility criteria associated to their LAS offerings.
LAS is a unique financial arrangement where borrowers use their stocks, mutual funds, bonds, and other financial assets as collateral. This is done to secure a loan against demat shares or other securities from a lender with a subsequently lower interest rate.
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