Loan Against Securities (LAS): A Comprehensive Guide

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), you can now access the funds you need without having to liquidate your investments. It is a type of loan where borrowers can pledge their securities, such as equities, mutual funds, fixed-income securities, ETFs, and insurance policies as collateral to obtain funds from a lender. 

Thus, in this article, we will delve into LAS meaning 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 limit that is advanced against loan against securities is determined on the type of collateral type pledged. The lender determines the loan amount that the borrower can avail under LAS by calculating a percentage of the market value of the pledged securities.

Thus, LAS is gaining popularity as it offers a more flexible and cost-effective alternative to traditional loans such as personal loans, auto loans, or credit cards. LAS 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, loan against securities interest rates are generally lower than other unsecured loans, making it an attractive option for borrowers looking to reduce their borrowing costs.

How Does Loan Against Securities Work?

Banks and NBFCs provide secured loans referred to as Loan Against Securities. These 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 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.

For example, if the securities are valued at Rs. 5,00,000, and the borrower withdraws Rs. 50,000 for six months, they will only pay interest on the utilised amount, i.e. Rs. 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, which the financial institution may settle after a set period, usually up to 24 months.

Applying Online or Offline? 

Online Approach 

1. Borrowers can apply for a loan against securities through an online approach.
2. They can visit the lender’s website and fill out an online application form.
3. Required details include the borrower’s name, contact information, PAN number, and details of the stocks to be pledged as collateral for the loan on stocks.
4. You may need additional documents to verify the borrower’s identity and stock ownership.
5. The lender reviews the application and informs the borrower of the loan amount and interest rate.
6. If the borrower agrees to the terms, they can sign the agreement and submit the required documents online.
7. Once the lender receives the pledged stocks, they will disburse the loan amount to the borrower’s bank account.

 Offline Approach 

1. Visit the lender’s branch office. 
2. Fill out a physical application form. 
3. Provide details such as name, contact information, PAN number, and stock details.
4. Submit required documents for identity and stock ownership verification
5. The lender reviews the application and informs the borrower of the loan amount and interest rate. 
6. Borrower signs agreement and submits required documents in person.
7. After receiving the pledged stocks, the lender disburses the loan amount to the borrower’s bank account.

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. Yes, that’s right. 

If you meet the eligibility criteria, you can apply for LAMF by following these steps: 

1. Visit the smallcase app and log in with your credentials. 
2. Under the ‘More’ section of the smallcase app, click ‘Loan Against Mutual Funds’. If you’re wondering who can apply for LAMF, read our article on Eligibility and Documents to get a better understanding. 
3. Choose the mutual fund units that you wish to pledge as collateral. 
4. Add a bank account where you wish you receive money once the loan gets approved. 
5. At last, sign the loan agreement and get funds credited to your bank account in just 2 hours. Yes, it’s that quick.

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 learn 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 collateral 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:

• Lower Interest Rate: With a loan against securities, 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 LAS ranges between 9% to 12%, 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 above 18 years of age. The applicant can also apply jointly with another applicant. They should, however, be gainfully employed and provide proof of a regular income source.
• 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 about 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 ends with zero foreclosure charges.

What is the Eligibility Criteria for a Loan Against Securities? 

Eligibility criteria for Loan Against Securities typically vary from lender to lender. Still, the following are some of the general requirements:

• The borrower must be an Indian citizen.
• The borrower must be at least 18 years old. 
• The borrower must possess a Demat account and eligible securities of sufficient quantity to serve as collateral for pledging
• The borrower must have a good credit score and repayment history. 
• The borrower must have a stable source of income to demonstrate repayment capacity. 
• The value of the securities pledged should meet the minimum requirements of the lender.

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:

• Proof of Identity: Aadhaar card, PAN card, passport, or voter ID card.
• Proof of Address: Utility bill, rental agreement, or Aadhaar card.
• Proof of Ownership of Shares: Demat account statement, share certificate, or broker’s contract note.
• Income Proof: Salary slip, income tax returns, or bank statements.

What are the Fees or Charges Required for LAS? 

In terms of fees and charges, LAS typically involves the following costs:

• Interest Rate: The loan against securities interest rate is usually lower than other unsecured loans. It may vary from lender to lender based on various factors, such as the type of security, creditworthiness of the borrower, and prevailing market conditions.
• Processing Fees: Lenders may charge a processing fee ranging from 0.5% to 1% of the loan amount to cover the cost of verifying and processing the loan application.
• Prepayment Charges: Some lenders may charge prepayment penalties if the borrower repays the loan before the due date. However, many lenders have waived this charge recently to attract more customers.
• Other Charges: Depending on the lender and the amount of the loan, other miscellaneous charges such as stamp duty, legal fees, valuation fees, and insurance may also apply.

It is important to carefully review and compare the fees and charges of different lenders before applying for a LAS to ensure that you are getting the best deal.

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 loan 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 loan against shares eligibility criteria is that the borrower must typically own the shares outright and have sufficient shares to pledge as collateral. The lender may also consider factors such as the market value of the stocks, the borrower’s credit score, and the purpose of the loan.

The maximum limit for loans against stocks depends on several factors, including the value of the pledged stocks, the borrower’s creditworthiness, and the lender’s policies. Generally, it can range from 50% to 70% of the market value of the pledged stocks.

Loan against shares can be a useful option for borrowers who need access to funds but do not want to sell their shares. However, lenders should also make borrowers aware of the risks associated with pledging stocks as collateral and carefully explain the terms and conditions of the loan before providing one.

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. Carefully consider your options and choose a lender that aligns with your financial objectives and requirements.

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: Make sure to check the eligibility criteria on the lender’s platform before moving ahead with applying. However, at smallcase, the eligibility criteria for applying for LAMF is basic, with minimum documentation requirements. The application process takes less time since it is 100% digital and paperless. 
• Opt for Loans with High Loan Value & Lower Interest Rates: Look for lenders that offer a high loan-to-value (LTV) ratio, allowing you to borrow a larger portion of your securities’ value. Additionally, compare interest rates across lenders to find the most competitive option. At smallcase, you can opt for LAMF for a lower interest rate of 10.75%, lower than unsecured loans. 
• Understand the Repayment Terms: It is important to carefully review the repayment schedule 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)’,

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. However, if you’re thinking to opt for a Loan Against Mutual Funds (LAMF) via smallcase then download the smallcase app today and enjoy financial freedom by pledging your mutual fund units without hampering your long-term investment objectives. 

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)

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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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