You can use shares as collateral and get instant funds
What's the story
When it comes to financial flexibility, most Indian investors don't realize their portfolio can work harder than simply growing over time.
A Loan Against Securities (LAS) provides the key to unlock your investments' value without the need to sell them.
This means you can address immediate financial needs without derailing your long-term investment journey.
Basics
Understanding loan against securities
A Loan Against Securities is basically a loan where you pledge your shares, mutual funds, bonds, or other securities as collateral.
Banks and NBFCs in India provide LAS up to a certain percentage (50% to 70% in most cases) of the value of your securities.
And, the interest rates are lower than personal loans as the risk to the lender is mitigated by holding your securities as collateral.
Process
How it works
In order to avail a Loan Against Securities, you need to pledge your securities to the lender. They evaluate the worth of these securities and approve a loan amount accordingly.
Although the securities continue to be in your possession, you can't sell them until the loan is completely repaid.
Notably, the interest is applicable only on the amount you use, not on the whole approved limit.
Advantages
Benefits at your fingertips
The most significant advantage of LAS is its affordability compared to unsecured loans such as personal loans or credit cards.
The interest rates are substantially lower, ultimately saving you money.
Plus, as it is secured against your investments, it is easier to get approved for it than for an unsecured loan.
Caution
Things to watch out for
Although LAS offers a significant advantage by addressing short-term liquidity needs without requiring the liquidation of long-term investments, it is not without risks.
In case of a substantial decline in market values and failure to promptly meet margin calls, lenders may resort to the sale of some of the pledged securities to mitigate their risk.
Such scenarios can result in losses if not prudently managed.
Strategy
Making it work for you
In order to truly benefit from a Loan Against Securities, you should have a clear repayment plan in place before you even apply.
Experts recommend using the loan for productive purposes like funding education or growing your business.
That way, you're making sure the money is well spent and not just used for speculation, which can increase your risk and potentially harm your financial health.