What is Loan Against Securities in India: Meaning, Interest Rates & How to Apply
At times, you may find yourself in need of instant liquidity – whether to meet a financial emergency, buy a house, open a new business, or simply manage cash flow. In such situations, the traditional option of selling your investments may not align with your long-term financial goals. However, with a Loan Against Securities (LAS) as an alternative to selling stocks, you can access the funds you need without having to liquidate your investments. In this article, we will delve into the meaning of LAS and provide a comprehensive overview of loan against securities, including its benefits, and risks. Moreover, we will cover LAS eligibility criteria, fees, charges, and the types of securities available for pledging.
What is Loan Against Securities (LAS)?
Loan Against Securities (LAS) is a type of loan where a borrower pledges their securities, such as stocks, mutual funds, bonds, and other financial assets, as collateral to obtain a loan from a lender. It allows individuals to leverage their investments and receive immediate liquidity without having to sell their securities. The value of the overdraft against securities is determined by the type of collateral type pledged. The lender determines the LAS loan amount that the borrower can avail by calculating a percentage of the market value of the pledged securities.
Thus, LAS loans are gaining popularity as they offer a more flexible and cost-effective alternative to traditional loans such as personal loans, auto loans, or credit cards. The LAS credit facility is especially beneficial for investors with a substantial portfolio of securities but need immediate cash for emergencies or opportunities. It is also a suitable option for those who do not want to liquidate their securities due to tax implications, market conditions, or sentimental reasons. Additionally, interest rate on loan against securities are generally lower than other unsecured loans, making it an attractive option for borrowers looking to reduce their borrowing costs. At smallcase, the interest rate is 10.5% per annum for LAMF loans.
How Does Loan Against Securities Work?
Banks and NBFCs provide secured loans referred to as Loan Against Securities. These LAS secured loans are backed by eligible securities such as shares, mutual funds, fixed deposits, and insurance policies. The cumulative value of these securities determines the loan-to-value in securities loan amount. Borrowers can access this overdraft facility by pledging their securities with the financial institution. They are only liable for interest payments on the withdrawn amount for the duration of usage.
Here’s an example for how loan against securities works. If the securities are valued at ₹ 5,00,000, and the borrower withdraws ₹ 50,000 for six months, they will only pay interest on the utilised amount, i.e. ₹ 50,000. Repayment terms offer flexibility, allowing for combined interest and principal payments or interest-only payments with a principal offset against collateral. It’s also possible to offset the entire loan against the underlying security. In certain cases, the loan can be structured as a demand loan. At smallcase, the loan against securities tenure for LAMF is 36 months.
Thinking of Applying for LAMF? Consider smallcase
Loan Against Mutual Funds (LAMF), a type of LAS, is a beneficiary monetary tool where the borrowers pledge mutual funds as collateral. Although taking a loan can take several days or weeks, opting for LAMF via smallcase is an effortless process where the application process just takes 5 minutes. You can access funds within 2 working hours without selling your mutual fund units.
If you meet the eligibility criteria, you can apply for LAMF by following these steps:
- Visit the smallcase app and log in with your credentials.
- Go to the ‘More’ section of the smallcase app and click ‘Loan Against Mutual Funds’.
- Tap on the ‘Apply Now’ button to start the application process.
- Add your Date of Birth (DOB) and PAN Card details to initiate the process.
- Enter the OTP to fetch your credit limit.
- Enter and check the loan amount after checking the credit limit.
- Link your bank account.
- Select the eligible funds you want to pledge. However, remember that once mutual fund units are pledged, they cannot be sold once the loan is closed.
- At last, sign the digital agreement for your loan.
Overall, borrowers can choose the approach that is most convenient for them based on their preferences and requirements. However, you can learn more about LAMF by reading our article on ‘Loan Against Mutual Funds (LAMF)’ to get a better understanding of its features, benefits, and much more.
Note: It is important to carefully review the terms and conditions of the loan and compare them with other options before investing.
Which Securities Can Borrowers Pledge as Collateral for Loan Against Securities?
Various types of approved securities can be pledged as credit against demat holdings for a loan against securities, including,
- Equities: Equities have high market value and high liquidity, making them one of the most commonly used securities for LAS. However, equities refer to stocks or shares of companies listed on the stock exchange, and they can experience volatility in their value, resulting in fluctuations in the loan amount.
- Mutual Funds: These are investment funds that pool money from multiple investors and invest in stocks, bonds, or other assets. You can opt for a loan against mutual funds that offers you the opportunity to receive immediate liquidity against the pledged mutual fund units.
- Fixed-income Securities: These are investments that pay a fixed interest rate, such as bonds, debentures, and fixed deposits. They are considered less risky than equities but may offer lower returns.
- Exchange-Traded Funds (ETFs): These are a type of investment fund that tracks a basket of assets such as stocks or commodities and trades like a stock on an exchange. ETFs offer diversification, low costs, and liquidity, but their value can be volatile.
- Insurance Policies: Some lenders also accept insurance policies such as endowment policies, money-back policies, or ULIPs as collateral for LAS.
What is the Difference Between Loan Against Securities and Other Types of Loans?
| Loan Against Securities | Personal Loan | Home Loan | Business Loan | Purpose | Repayment Tenure |
|---|---|---|---|---|---|
| Loan Type | Securities such as stocks, mutual funds, bonds, etc. | Lower than any other unsecured loans | A percentage of the market value of pledged securities | Emergencies, opportunities, working capital, debt consolidation, etc. | Flexible, up to the tenure of the loan |
| Collateral | None | Higher than LAS | Up to a certain limit based on income and credit score | Personal expenses such as weddings, vacations, medical emergencies, etc. | Typically 1 to 5 years |
| Interest Rates | Property | Lower than personal loans but higher than LAS | Up to a certain percentage of the property value | Purchase or construction of a home or property | Up to 30 years |
| Business Loan | Business assets such as inventory, equipment, accounts receivable, etc. | Higher than LAS | Depends on the type of business and its financials | Working capital, expansion, purchase of assets, etc. | Typically 1 to 5 years |
| Credit Card | None | Higher than LAS | Based on the credit limit assigned by the issuer | Personal expenses such as shopping, dining, travel, etc. | Typically a minimum monthly payment |
What are the Benefits of a Loan Against Securities?
Here are a few advantages of taking a loan against collateral at smallcase:
- Lower Interest Rate: One of the benefits of pledging securities is that the borrower is using their own stocks, bonds, or other securities as collateral. This collateral reduces the risk for the lender, as they can seize the assets if the borrower defaults. This lower risk allows the lender to offer a lower interest rate. The interest rate for LAMF at smallcase is 10.5%, which is lower than the interest rate of unsecured loans.
- Basic Eligibility Criteria: Borrowers with mutual fund holdings in their demat account can apply for a loan against shares and securities. The applicant must be an Indian citizen and 18-70 years of age.
- 24×7 Access to the Account: You can access your loan account at any time and anywhere. You can also contact the customer support team if you need further assistance with the loan.
- Overdraft & Interest: A loan against securities is similar to an overdraft loan. The main difference is that with a loan against securities, you’re using the stocks, bonds, or other securities you own as collateral to borrow money. This makes it a flexible borrowing option because you only pay interest on the funds you actually withdraw and use from your account, not the full loan amount.
- Flexible Repayment Option: With a LAS, you can repay the loan in a way that works best for your financial situation, similar to an overdraft facility. You can pay just the monthly interest, resulting in lower EMIs. This allows you to manage your cash flow more easily. Additionally, you can close the loan before the tenure of 36 months ends with zero foreclosure charges.
What is the Eligibility Criteria for a Loan Against Securities?
Eligibility criteria for Loan Against Securities at smallcase is listed below:
- Age: 18 – 70 years
- Investor Type: Individual investors (NRIs & HUFs not eligible)
- Mutual Funds: Must hold eligible mutual fund units in dematerialised (Demat) form
- KYC Compliance: PAN & Aadhaar-linked mobile number required
What are the Documents Required to Opt for a Loan Against Securities
In addition to the eligibility criteria, the borrower must also provide certain documents when applying for a loan against assets, shares & mutual funds. These documents may include:
- Identity Proof: PAN Card
- Address Proof: Aadhaar Card
- Bank Account Details: For loan against MF disbursement & interest auto-debit
- Demat Account: Mutual fund holdings must be in Demat form
What are the Fees or Charges Required for LAS?
In terms of fees and charges, LAS typically involves the following costs:
| Type of fee | Applicable charges |
| Interest rate | 10.5% p.a. |
| Processing fee | ₹999 or 1% of loan amount whichever is higher upto a maximum of ₹4999 (GST applicable)Example –loan less than 1 lakh: ₹999 + GSTloan between 1 to 5 lakh: 1% of sanctioned amt + GSTloan greater than 5 lakh: ₹4999 + GST |
| Late Payment Interest | Penal Interest is charged @ 2% per month |
| Bounce charges (for failed interest payment) | Rs 1200 per bounce |
| Part-prepayment charges | NIL |
| Foreclosure charges | NIL |
| Mandate inactive charges | NIL |
| Mandate verification (charged by your bank) | As charged by your bank (typically between Rs. 0 to Rs. 150) |
| Lien removal charges (if requested after taking loan) | NIL |
| Lien removal charges (if loan is canceled before disbursement) | Actual processing fee applicable |
| Collection/legal Charges (in case of default) | At actuals |
What is a Loan Against Shares?
A loan against shares is a type of loan where the borrower pledges their shares as collateral in exchange for money. The amount of the secured loan on shares depends on the value of the pledged shares, and the lender may hold the shares as collateral until the borrower repays the loan.
Compared to other types of securities, loans against shares may offer lower interest rates since shares are generally considered more liquid and less volatile than other types of securities. However, the maximum loan amount may also be lower since stocks can be subject to market fluctuations and may not hold their value over time. The eligibility for loan against securities is that the borrower must typically own the shares outright and have sufficient shares to pledge as collateral.
How to Manage Your Loan Against Securities?
Here are two effective ways you may adapt to manage your Loan Against Securities:
Monitoring Market Volatility
To effectively manage a loan against securities, it’s crucial to keep a close watch on market fluctuations. These shifts can significantly impact the value of pledged assets, potentially leading to heightened security requirements. It’s advisable to refrain from borrowing against securities when market prices are expected to decline.
Selecting a Trustworthy Lending Partner
When opting for LAS, choosing a reputable lender is paramount. Look for a lending institution that adheres to fair practice codes, ensuring fairness, transparency, and ethical conduct in their lending operations. Meeting the lender’s specific eligibility criteria is a prerequisite for accessing LAS, which may include requirements like maintaining an account and adhering to minimum balance stipulations. Lenders should also make borrowers aware of the risks of loan against securities and carefully explain the terms and conditions of the loan before providing one.
Things to Consider Before Taking a Loan Against Securities
Here are a few important factors to keep in mind before taking a loan against your securities:
- Check your Eligibility: At smallcase, the eligibility for loan against securities is basic, with minimum documentation requirements. The application process takes less time since it is 100% digital and paperless.
- Understand the Repayment Terms: It is important to carefully review the repayment options for loan against securities and ensure you can comfortably make the payments. Consider your cash flow and financial obligations before committing to a loan. Additionally, check the penalties that are going to be applied (if any).
- Monitor Your Collateral: You should keep track of the value of your pledged securities and maintain a sufficient margin to avoid margin calls or forced liquidation of your assets in case of a market downturn.
For a better understanding, read our blog on ‘Rules to Follow While Applying For Loan Against Securities (LAS)’.read our blog on ‘Rules to Follow While Applying For Loan Against Securities (LAS)’.
To Wrap It Up…
To conclude, a Loan Against Securities (LAS) allows individuals to pledge their securities, such as stocks, mutual funds, bonds, and other financial assets, as collateral to obtain a loan from a lender. Borrowers can pledge various types of securities as collateral, including equities, mutual funds, fixed-income securities, ETFs, and insurance policies.
Note: Since each type of security comes with its own benefits and risks, it is advisable to consult a financial advisor before making an investment decision.
Frequently Asked Questions on Loan Against Securities (LAS)
Loan against security is a secured loan where the borrower’s financial assets, such as stocks, bonds, mutual funds are used as collateral. This enables lower interest rates and flexible repayment terms compared to unsecured personal loans.
The primary objective of obtaining a LAS is to meet financial needs without selling your securities, thereby preserving your investments and continuing to earn returns from them. This type of loan allows individuals to pledge their securities, such as stocks, bonds, mutual funds, or other financial assets, as collateral to secure a loan from a lender.
Yes. There are no foreclosure charges on the smallcase LAMF.
At smallcase, the loan amount for a loan against mutual funds starts from ₹ 25,000 onwards.
To close the LAS account, you need to first pay off the entire outstanding loan amount, including any accrued interest. This will clear the dues on the loan. Once the loan is fully repaid, you can reach out to our customer support to request closure of the LAS account.
A loan against securities (LAS) is a secured loan where securities like stocks or mutual funds are pledged as collateral, offering lower interest rates and higher loan amounts. In contrast, a personal loan is unsecured, has higher interest rates, and depends on the borrower’s income and creditworthiness rather than collateral.
A loan against securities (LAS) is not taxable since it is a debt and not income. However, if the lender sells pledged securities due to non-repayment, any capital gains tax may apply on the sale. Additionally, interest paid on LAS is generally not tax-deductible unless used for business or investment purposes.
Disclaimer: The content in this article is purely the author’s personal opinion and is for informational and educational purposes only. It should not be construed as professional financial advice and nor be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.
The views and opinions stated in the content belong to the author. smallcase Technologies Private Limited does not uphold nor promote any of the views/opinions.
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