Loan Against Securities: Its benefits and how to manage it

In the vast expanse of financial products, the Loan Against Securities (LAS) stands out as a unique, convenient solution for those in need of quick liquidity while still keeping their investment portfolio intact. Encompassing a wide array of securities, such as shares, bonds, mutual funds, fixed deposits, and insurance policies, the LAS opens the door to immediate cash flow by allowing individuals to pledge these assets as collateral. 

These financial instruments not only enables access to immediate funds but also provides the flexibility to keep the potential for future gains from the pledged assets alive. In the following sections, we delve deeper into the numerous benefits of LAS and the strategies for its effective management, offering a comprehensive guide to optimising this unique financial solution.

Benefits of Loan Against Securities

Efficient financial assistance

One of the chief benefits of LAS is swift access to financial assistance. Due to the security provided in the form of assets, loan approval, and disbursement typically occur within a few days, proving particularly useful in emergencies.

Asset retention and potential future gains

Unlike liquidating investments, an LAS allows the borrower to retain their assets while benefiting from potential future gains such as dividends or bonuses. As such, borrowers can continue to realise the full potential of their investments even while they are pledged.

Lower interest rates

Given that the loan is secured against valuable assets, financial institutions typically offer lower interest rates compared to other personal loans or credit card debt. This makes LAS a cost-effective choice for borrowers.

Flexible utilisation

The LAS functions as an overdraft facility where interest is charged only on the withdrawn amount for the period of its use, providing greater flexibility to borrowers. For instance, if securities worth Rs 1 lakh are pledged and the borrower withdraws only Rs 20,000 for 3 months, the interest will be charged solely on Rs 20,000.

Managing loan against securities

Keep an eye on market fluctuations

While LAS has many benefits, it is crucial to manage it effectively to avoid any potential downsides. As the loan value depends on the combined cash value of the securities, borrowers should be cognisant of market fluctuations which could affect the value of their pledged assets. The biggest danger for a borrower can happen when due to the falling value of securities, the lender asks for more security to secure the loan amount. This is why many financial analysts advise against borrowing against securities in market conditions when prices are likely to fall. 

Choosing a reliable lender

When opting for a Loan Against Securities, borrowers should choose a reliable lender that adheres to fair practice codes. Such codes ensure fairness, transparency, and ethical practices in lending business, protecting the borrower's interests. To avail LAS, it is important for borrowers to meet the eligibility criteria set by the lender. Each lender sets different sets of criteria for availing any LAS. These may include having a savings or current account with the lending institution, maintaining a specific minimum balance, and the like.