5 Important Things to Know Before You Apply for a Loan Against Securities
Ever found yourself in a financial pickle where you needed funds but didn’t want to liquidate your investments? Life is evolving, and so are your financial needs. While you may have securities to rely on, it could directly trigger your tax liabilities. In terms of loan against securities (LAS), at smallcase, we can provide a loan against mutual funds & a loan against your invested smallcases that helps you gain instant access to capital. Now, let’s dive into understanding the 5 things to know before taking loan against securities.
What is Loan Against Securities (LAS)?
In a Loan Against Securities scheme (LAS), you pledge the securities held in your demat account to obtain an overdraft against securities from a financial institution. Just like gold or house loans, your collateral could be securities like stocks, mutual funds, bonds, or other eligible financial instruments. This includes mutual funds, which can also be used as collateral for loans. At smallcase, we offer digital loans against securities, including mutual fund loans, loan against equity funds, and loan against debt funds.
When you take a securities collateral loan, your pledged shares remain in your account, but the lender places a lien on them until the loan is fully repaid. For instance, with smallcase, you can obtain a loan against mutual funds at a competitive securities loan interest rate, starting at 10.5% per annum.
The lender determines the loan amount based on the loan-to-value ratio for securities (LTV ratio), which represents the percentage of the market value you can borrow. A higher LTV ratio for securities allows access to more funds. The benefit of securities-based lending is that you continue to earn dividends and interest on your securities while using them as collateral.
5 Things to Know Before Getting Loan Against Securities (LAS)
Before applying for a loan against demat holdings at smallcase, here are 5 important rules for securities loans you should consider:Thus, let’s have a look at them.
1. Securities Loan Eligibility
One of the most crucial factors is your securities loan eligibility. At smallcase, the eligibility criteria for a digital loan against securities are simple:
- You must be an Indian citizen.
- Your age must be between 18-70 years.
- You should have an active PAN card linked to your account.
To ensure approval, review the eligibility criteria for a loan against securities and prepare accordingly.
2. Loan Amount & Loan-to-Value Ratio
The loan amount depends on the value of the pledged securities. With smallcase, you can avail a digital loan against mutual funds from ₹25,000 onwards. The loan-to-value ratio for securities determines how much you can borrow based on the market value of your holdings.
3. Securities Loan Tenure
The securities loan tenure varies by lender. At smallcase, customers can opt for a loan against securities for up to 36 months. Some lenders offer flexible repayment plans where you pay only interest monthly and defer principal repayment until the end of the tenure.
4. Securities Loan Interest Rate & Fees
Understanding the total cost of borrowing is essential. Some lenders charge processing fees, and it’s crucial to check for hidden charges in a securities loan before applying. At smallcase, the interest rate for loans against mutual funds is 10.5%.
5. Repayment Strategy & Risks
A well-planned repayment strategy is key to preventing the loss of pledged securities. If the value of your securities drops, the lender may require additional collateral or loan repayment to maintain the LTV ratio. Failure to do so may result in liquidation. Knowing the 5 risks of a loan against securities will help you manage these challenges effectively.
Which is Better – Breaking Investments or Taking a Loan Against Securities?
Should you liquidate investments or opt for a loan against securities? Selling investments may result in tax implications and lost future returns, whereas a securities-based lending option lets you access funds while retaining ownership. If you have a repayment plan, a non-recourse securities loan or margin trading loan may be a better alternative for maintaining your financial stability.manage the interest on the loan, LAS is often the better choice to maintain your financial portfolio’s health and long-term growth.
To Wrap It Up…
A loan against securities is a flexible financial solution, allowing individuals to access liquidity without selling valuable investments. By leveraging online securities loans, borrowers can secure funds while still benefiting from market growth.
It’s a win-win proposition that offers flexibility, convenience, and financial peace of mind.
So, if you’re looking to meet immediate financial needs or seize new opportunities without compromising your long-term financial goals, consider having a look at the 5 things to know before getting loan against securities. It’s a step towards financial empowerment that can help you achieve your aspirations while safeguarding your investments. Check out loan against mutual funds via smallcase today!
Frequently Asked Questions About Things to Know Before Applying for LAS
The full form of LAS is ‘loans against securities’. This refers to a loan against bonds, stocks or other securities is a secured loan that borrowers can obtain by pledging their shares as collateral which means that the lender will hold the shares until the loan is repaid.
You should consider taking a loan against shares (LAS) when you have a short-term financial need, and you don’t want to sell your shares.
If the value of your shares declines while you have the LAS outstanding, the lender may require you to deposit additional collateral or repay some of the loan principal to maintain the required LTV ratio. If you are unable to do so, the lender could liquidate your shares.
The key factors include the type and value of securities pledged, the borrower’s credit score, loan-to-value (LTV) ratio, repayment history, and the lender’s risk assessment policies.
Major risks include market volatility affecting security value, margin calls, high interest rates, potential liquidation of pledged assets, and limited loan tenure.
Benefits include quick access to liquidity, lower interest rates than unsecured loans, continued ownership of securities, flexible repayment options, and no prepayment penalties with some lenders.
Common mistakes include overleveraging, ignoring market risks, not comparing lender terms, misunderstanding margin call implications, and pledging volatile securities.
All About Loan Against Securities & Loan Against Mutual Funds on smallcase –
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