Loan Against Securities (LAS): A Simple Guide for Beginners

Financial emergencies often get individuals into situations where they either have to choose between liquidating hard-earned investments or taking out a personal loan. Both of these options come with big trade-offs. For instance, selling investments may trigger capital gains tax and make it difficult to build wealth over time, while unsecured loans often carry high interest rates.

Table of Content

• What is a Loan Against Securities (LAS)?
• How is a Loan Against Securities Different From Other Loans?
• How to Apply for a Loan Against Securities
• Benefits of Loan Against Securities
• Eligibility Criteria for Loan Against Securities
• Things to Consider While Applying for a Loan Against Securities

In situations like these, a Loan Against Securities (LAS) can be one of the most strategic options. It lets investors get the most out of their existing portfolio without having to sell it.

Let’s understand more about how Loan Against Securities is different from other loan types, what benefits it offers, and what you must carefully consider before opting for it.

What is a Loan Against Securities (LAS)?

A Loan Against Securities is a type of secured loan where you can borrow money using your financial assets, such as stocks, mutual funds, or bonds, as collateral.

Herein, the lender places a lien on your securities for the duration of the loan. Crucially, the ownership of these securities remains with you, which means your investments continue to make returns throughout the tenure. Once you repay the loan in full, the lien is removed, and the portfolio is yours again.

Suggested Read: What is a Loan Against Mutual Funds and How Does it Work?

How is a Loan Against Securities Different From Other Loans?

How to Apply for a Loan Against Securities

Here’s a step-by-step guide to help you apply for an instant Loan Against Securities:

• Pick your lender - You can choose a bank or a Non-banking Financial Company (NBFC) that offers Loan Against Securities and accepts the types of securities you hold. Just make sure to check this ahead of time, as different lenders have different approved lists of securities.
• Apply and complete KYC - Submit your application along with the required documents for KYC. Most lenders allow you to apply online with only minimal paperwork involved.
• Pledge your securities - You can pledge your securities online through the depository system. This creates a lien for the lender while the ownership of the investments remains with you.
• Loan Sanction - The lender assesses the current market value of your pledged securities and determines the loan amount based on the applicable Loan-to-Value (LTV) ratio — the percentage of your investment’s value that they are willing to lend.
• Withdraw as needed - The lender sets up an overdraft account in your name. You can withdraw funds as and when needed, and interest is calculated only on the amount you actually use, not the entire sanctioned limit.

Benefits of Loan Against Securities

Lower cost of borrowing: Interest on Loan Against Securities typically ranges between 8% and 12% per year, which is significantly lower than most personal loans.

Your investments continue to grow:  Even while your securities are pledged, you continue to earn dividends or benefits from capital gains.

Pay interest only on what you use: With an overdraft, you only pay interest on the withdrawn amounts, not on the entire sanctioned limit.

Flexible repayment: There are no fixed EMI plans. You can repay as per your cash flow – pay just the monthly interest or clear the full amount ahead of schedule, often with a minimal prepayment penalty.

Broad end use: You can use the loan amount for medical expenses, business needs, education, travel or personal use. However, it cannot be used for speculative activities linked to capital investments.

Suggested Read: How to Get a Personal Loan against Fixed Deposit - A Step-by-Step Guide

Eligibility Criteria for Loan Against Securities

To qualify for a Loan Against Securities, you must:

• Be a citizen of India and at least 21 years of age at the time of application
• Hold approved financial instruments in a demat account or mutual fund folio that can be pledged online.
• Have income proof (salary slips or income tax returns) to demonstrate and verify repayment ability.

Things to Consider While Applying for a Loan Against Securities

Loan Against Securities is a powerful financial tool, but only when used wisely. Here are a few things you should carefully think through:

Market volatility - The value of pledged securities fluctuates with market conditions, which may affect the LTV ratio and lead to a margin call – a request from the lender to either pledge additional securities or repay a portion of the loan to restore the required margin.

Forced selling is a real risk - In case of a sharp market decline, if you fail to respond to margin calls, the lender has the right to sell your pledged securities to recover the outstanding dues. Hence, always have a backup plan in place.

Borrow only what you need - Since Loan Against Securities is easy to access, it can be tempting to borrow more than you need. Hence, best to treat it as a short-to-medium-term liquidity solution, not a long-term financial habit.

Compare lenders - Different banks and NBFCs have different interest rates, processing fees, approved security lists, and LTV ratios. Hence, before applying, make sure to compare all applicable charges across lenders. 

A Loan Against Securities is one of the best financial tools available to investors in India. If used wisely, it can help meet your short-term cash needs while still working towards building your long-term wealth.

If you want to get an instant Loan Against Securities, Muthoot Finance can help you get started with a simple and reliable process. Call or visit your nearest branch today for more details.