How Does the Loan Against Securities (LAS) Work in Banking?

Are you planning to sell off all your long-term investments to meet an unforeseen financial emergency? Don’t do it! 

There is a smarter way to deal with this crisis. Instead of liquidating your shares, mutual funds or bonds, go for a loan against securities (LAS). This option grants timely access to funds without you having to sacrifice your investments. 

Learn about how to apply for a loan against securities, its benefits and how it can help you combat financial hiccups.

Key Takeaways

• A Loan Against Securities (LAS) lets you borrow by pledging shares, bonds or mutual funds without selling them.
• The loan amount is based on the market value of the pledged securities.
• Ownership of the securities remains with the borrower, allowing continued dividends and capital gains.
• Interest is charged only on the amount utilised. 
• LAS interest rates are lower than personal loans and generally range between 8-15%.

How Does the Loan Against Securities Work?

To understand what a loan against securities is, it is important that you have a grasp of how it works. You start by pledging the respective assets. This shall include bonds, stocks or mutual funds. These assets serve as forms of security or collateral for your loan. 

Next, the market value of these securities will be taken into account. As per the analysis, the loan amount shall be determined. Post evaluation and subsequent approval of the securities, the respective bank shall grant the loan. 

You will then have to repay the amount in accordance with the set terms and conditions established prior. 

Features & Benefits of Opting for a Loan against Securities

Did you know that several Indian investors now go for lending against securities instead of liquidating them? Here are a few major reasons why:

1. Immediate Liquidity: You will conveniently be able to raise the necessary funds without having to resell/redeem any long-term investments.
2. Comparatively Lower Rates of Interest: The interest rates generally range between 8% to 15%. This range is much lower in comparison to unsecured loan interest rates.
3. Earning Continues Even as You Borrow: You will continue to earn dividends/capital appreciation even after you have pledged your assets. This is because you still retain ownership over them.
4. Interest is Applicable Only on the Amount Used: LAS works in a similar manner to an overdraft facility. So, you have to pay the applicable interest only on the amounts you withdraw.
5. Flexible Repayment System: You just have to pay a monthly interest. Alternatively, you can choose to prepay at any time with zero to minimal foreclosure fees (varies as per the variant) to worry about. Several lenders allow for prepayments in parts, interest-only EMIs and even bullet repayment.
6. Easy Eligibility Criteria: Indian citizens who are above the age of 18 with their securities in demat format are eligible to apply.
7. 24/7 Access to the Account: You can easily keep up with your loan account at any time of the day. Connect with customer support if required, at your own convenience.
8. Digital Access: You can manage your loan online. Check the statements and, if needed, request top-ups from your virtual dashboard.
9. No-end Use Restriction: There are no end-use restrictions applicable to LAS, which signifies that the borrower is free to spend the funds from a LAS for any purpose. No particular limitations shall be imposed by the lending institution.
10. Facility of Top-up: Do you think you will require more funds later on? You can use the same securities to bag additional credit. You will not even have to reapply and go through the entire process all over again. 

Which Factors Affect Loan Against Securities Interest Rates?

Loan against securities interest rates are not fixed, as they are in the case of personal loans. They are dynamic and shall vary as per multiple factors. For example, the LAS interest rates for Axis Bank start from 11.50%, while SBI offers rates ranging between 10.70% and 11.20%.

Here are the factors which impact the loan against securities interest rates:

• Individual Credit Profile: A higher credit score (750+) and a stable source of income enhance one’s chances of unlocking a lower interest rate.
• Market Conditions & Fluctuations: The current state of liquidity within the financial market and repo rates impact the ‘base rate’.
• Security Type: AAA-rated bonds and blue-chip stocks, for example, are typically known to come with favourable terms in comparison to assets categorised as less liquid/high-risk.
• Loan-to-Value Ratio (LTV): A lesser LTV minimises the lender’s risk. This shall help negotiate a more favourable rate of interest.
• Loan Amount & Tenure: A shorter tenure or higher loan amount shall negatively or positively influence the interest rate.

The Bottom Line

A loan against securities or LAS is a smart way to raise the necessary funds without disturbing your long-term investments. Enjoy low interest rates and rather flexible repayment obligations with this facility. Plus, you can continue to receive returns on the pledged assets. 

You may be a rising entrepreneur or someone looking to better manage cash flow in the short term. In either case, LAS serves as a quick, flexible and budget-friendly avenue of liquidity.