A loan against securities (LAS) is a secured loan where borrowers pledge financial assets like shares, mutual funds, bonds, or insurance policies as collateral. It allows individuals to access funds without selling their investments, making it a convenient option for short-term financial needs. Understanding the process of obtaining a loan against securities helps borrowers secure funds efficiently while maximising their financial benefits.
What is a Loan Against Securities
A loan against securities is a type of overdraft facility provided by banks and NBFCs against the pledge of financial assets. Instead of liquidating investments, borrowers can leverage them to meet urgent fund requirements while continuing to earn returns on their holdings. This type of loan is commonly used for business expansion, education expenses, medical emergencies, and other short-term financial obligations. The loan amount is determined based on the value and liquidity of the pledged securities, and the borrower is only charged interest on the utilised funds.
Steps to Get a Loan Against Securities
Following are the steps to obtain a loan against securities.
Step 1: Assess Your Financial Needs
Before you apply, take a moment to analyse how much funds you need. Borrowing more than necessary can lead to higher interest payments while borrowing too little might not meet your requirements. Also, consider your repayment ability, as repaying it on time is crucial to keeping your securities safe.
Step 2: Choose the Right Lender
Different lenders offer varying terms and interest rates for loans against securities. It is crucial to compare banks, NBFCs, and financial institutions based on factors like interest rates, processing fees, loan tenure, and customer service. The maximum loan-to-value (LTV) ratio and the types of securities accepted also play a significant role in determining the appropriate lender. Borrowers should opt for a lender that provides flexible terms and a smooth borrowing experience.
Step 3: Check Eligibility Criteria
Each lender has specific eligibility criteria that borrowers must meet to qualify for a loan against securities. The common eligibility requirements include the applicant’s age, income source, and the type of securities pledged. Most lenders prefer borrowers between 18 and 65 years old with a steady income source, whether salaried or self-employed. Checking these criteria in advance helps avoid loan rejection and ensures a hassle-free process.
Step 4: Understand the Loan-to-Value (LTV) Ratio
The Loan-to-Value (LTV) ratio determines how much loan can be availed against the pledged securities. Lenders assign different LTV ratios based on the type of security. Generally, borrowers can get up to 50-70 % of the pledged security’s market value. A lower LTV ratio results in better loan terms, while a higher LTV ratio may lead to increased interest rates and stricter repayment conditions.
Step 5: Gather Required Documents
To apply for a loan against securities, borrowers need to submit identity proof, address proof, and income-related documents. Additionally, details related to the pledged securities, such as Demat account statements, mutual fund holdings, or bond certificates, must be provided. The loan application form must also be duly filled and signed. Having these documents ready ensures quick loan processing and approval.
Step 6: Apply for the Loan
Borrowers can apply for a loan against securities through online or offline channels. Many financial institutions provide digital application facilities, allowing borrowers to submit their details and upload documents conveniently. The application process typically involves filling out the loan application form, submitting required documents for verification, and providing Demat account details for pledging securities. Evaluate the loan against securities interest rates and read the terms and conditions carefully. Online applications are usually processed faster, while offline applications may require a visit to the lender’s branch.
Step 7: Securities Pledging and Verification
Once the loan application is submitted, the lender verifies the authenticity of the pledged securities. This includes checking the market value of the securities, confirming ownership, and ensuring their eligibility for the loan. The securities remain in the borrower’s Demat account but are marked as pledged, restricting their sale or transfer until the loan is repaid. If the securities meet the lender’s requirements, the loan application is forwarded for approval..
Step 8: Loan Approval and Overdraft Limit Allocation
Upon successful verification, the lender approves the loan and assigns an overdraft limit based on the LTV ratio. Borrowers receive access to a loan account or overdraft facility, where they can withdraw funds as needed. The sanctioned limit depends on the market value of the pledged securities and the borrower’s overall financial profile. The approved amount is informed to the borrower, and they can access funds as per their requirements.
Conclusion
A loan against securities is a suitable financing option for individuals looking to leverage their investments while retaining ownership. By understanding the application process, eligibility criteria, and repayment terms, borrowers can make informed decisions and optimise their financial strategies. Proper planning and lender selection can help secure terms well suited for you, ensuring a smooth borrowing experience with minimal financial risk.
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