Understanding loan against securities
A loan against securities is a convenient way to borrow funds by using your financial investments as collateral. Instead of selling your assets, you can pledge instruments like shares, mutual funds, bonds, or insurance policies to secure a loan. This type of lending against securities allows you to unlock liquidity without disrupting your investment portfolio.
How is a loan against securities different from personal loans?
Let us understand how loan against securities is different from the other types of loans for better understanding:
Loan type |
Loan against securities |
Personal loan |
Collateral |
Securities such as stocks, mutual funds, bonds, etc. |
None |
Loan amount |
A percentage of the market value of pledged securities |
Up to a certain limit based on income and credit score |
Purpose |
Emergencies, opportunities, working capital, debt consolidation, etc. |
Personal expenses such as weddings, vacations, medical emergencies, etc. |
How do loans against securities work?
1. Security valuation: When applying for a loan against securities, the lending institution assesses the value and liquidity of the securities you intend to pledge. The loan amount is usually a percentage of the total value of the securities, and this percentage can vary depending on the type of securities.
2. Loan approval: Once the collateral has been evaluated, the lender determines the loan amount they are willing to offer to the borrower. The borrower then agrees to the terms and conditions, including the interest rate and repayment schedule.
3. Loan disbursement: After the loan agreement is signed and securities are pledged, the funds are disbursed to the borrower. These funds can be used for various purposes, such as business investment or personal expenses.
Repayment: Borrowers are required to repay the loan according to the agreed-upon terms. The securities pledged as collateral are held by the lender until the loan is repaid in full. If the borrower defaults, the lender has the right to sell the securities to recover the outstanding amount.
What are the Benefits of a Loan Against Securities?
A loan against securities lets you borrow money by pledging your financial investments—like shares, mutual funds, bonds, or insurance policies—without having to sell them. It’s a smart way to access liquidity while your assets continue to generate returns. Here are a few advantages of taking a loan against collateral:
Lower interest rate: With a loan against securities, the borrower uses their own stocks, bonds, or other securities as collateral. This collateral reduces the lender's risk, 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 over 18 years of age. The applicant can also apply jointly with another applicant. They should be gainfully employed and provide proof of a regular income source.
24/7 Access to the Account: You can access your loan account anytime, anywhere. You can also contact the customer support team for further assistance.
Overdraft & interest: A loan against securities is similar to an overdraft loan. The main difference is that with a loan against securities, you use your own stocks, bonds, or other securities 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 suits 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.
Eligibility criteria for loan against securities
To qualify for a loan against securities, individuals typically need to meet certain criteria:
- Ownership of securities: Borrowers must own eligible securities, such as stocks, mutual funds, or bonds, that can be pledged as collateral for the loan.
- Loan amount: The loan-to-value ratio may vary, but borrowers often need securities worth more than the loan amount sought.
- Age and residency: Some lenders may have age restrictions and require borrowers to be residents of the country where the loan is sought.
Fees or charges required for LAS
When availing a loan against securities, borrowers may encounter various fees and charges:
- Interest rate: Lenders typically charge interest on the borrowed amount.
- Processing fees: Lenders may impose processing fees for initiating the loan.
- Penalties: Late payment or default may incur penalties.
- Prepayment charges: Some lenders may levy charges if the loan is repaid before the tenure ends.
Factors affecting loan against securities interest rates
Several factors influence interest rates for loans on security:
- Market conditions: Interest rates may fluctuate based on prevailing market conditions.
- Lender's policies: Each lender sets its interest rates based on its risk assessment and cost of funds.
- Borrower's profile: Creditworthiness, loan amount, and tenure can impact the interest rate offered.
- Type of security: The type and quality of securities pledged may affect the interest rate.
- Loan-to-Value Ratio (LTV): A higher LTV ratio can increase interest rates due to the higher risk for the lender.
Features of loan against securities
- Quick access to funds: Loans against securities offer a swift and convenient way to access capital without the lengthy approval process associated with traditional loans.
- Lower interest rates: These loans typically come with lower interest rates compared to personal loans or credit card debt because they are secured by liquid collateral.
- Retain investment portfolio: Borrowers can continue to benefit from the potential appreciation of their securities while using them as collateral for a loan.
Things to consider before availing loan against securities
Before opting for a loan against securities, individuals should consider the following factors:
- Interest rate: Compare interest rates offered by different lenders.
- Loan-to-value ratio: Understand the maximum loan amount relative to the value of pledged securities.
- Repayment terms: Assess the repayment schedule and flexibility offered by the lender.
- Risk of margin calls: In case of a decline in security value, borrowers may face margin calls or need to pledge additional securities.
Securities pledged as collateral for loan against securities
Various types of securities can be used as collateral for loans. Bajaj Finance Limited offers the following loans against securities:
What is the process for applying for a loan?
Applying for a loan against securities involves several steps. Below is an outline of the process:
- Application submission: Fill out an application form, providing personal details and information about the securities being pledged.
- Loan evaluation: The lender reviews the application and assesses the value of the pledged securities.
- Offer & agreement: The lender offers the loan amount and interest rate based on the evaluation. The borrower reviews and agrees to the terms.
- Disbursement: After the borrower signs the agreement and pledges the securities, the loan is disbursed to their bank account.
Applying online or offline?
There are two approaches to applying for a loan against securities: online and offline.
Online approach
- Visit the lender’s website and fill out the online application form.
- Provide necessary details such as name, PAN number, and security information.
- Submit any required documents for verification.
- The lender reviews the application and offers the loan amount and interest rate.
- Once terms are agreed upon, sign the agreement and submit documents online.
- The loan amount is disbursed after the lender receives the pledged securities.
Offline approach
- Visit the lender’s branch and fill out a physical application form.
- Provide the necessary details and submit documents for verification.
- The lender reviews the application and offers the loan amount and interest rate.
- Sign the agreement and submit documents in person.
- After the lender receives the pledged securities, the loan is disbursed to the borrower’s account.
How to apply for loan against securities on Bajaj Finserv?
Applying for a loan against securities with Bajaj Finserv is a straightforward process:
- Click on ‘Apply Now’ to begin the application.
- Enter your mobile number and click ‘GET OTP’.
- Enter the OTP sent to your mobile for verification and proceed to the application form.
- Provide basic details such as full name, email ID, mobile number, and city of residence.
- Choose the type of security to pledge as collateral.
- Enter the total portfolio value of your bonds and submit.
A Bajaj Finserv representative will then contact you to complete the application process.
Conclusion
A loan against securities is a valuable financial instrument that allows individuals and businesses to unlock the value of their investments without liquidating them. This method provides quick access to funds, often at lower interest rates, while enabling borrowers to maintain their investment portfolios. Whether you are looking to finance a business venture or meet personal financial goals, lending against securities offers a flexible and efficient solution for your capital needs. It’s important to carefully evaluate the terms and conditions offered by different lenders and choose the one that best aligns with your financial requirements.
