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A Loan Against Securities (LAS) allows you to borrow money by pledging your financial assets, such as stocks, bonds, or mutual funds, as collateral. The loan amount is typically a percentage of the value of these pledged securities. Let’s explore the working mechanism of LAS in detail:
When you apply for LAS, you pledge your securities to a lender, who assesses their value and offers you a loan based on a pre-determined loan-to-value (LTV) ratio. The securities act as collateral for the loan, and you retain ownership of them.
LAS can be backed by a variety of securities. Understanding the types of assets you can use as collateral is essential before proceeding. Below are the most common securities accepted:
Stocks of listed companies are one of the most common forms of collateral for LAS. Lenders typically prefer stocks of stable companies with good market liquidity. Let’s look into other forms of collateral:
Bonds, including government securities, and debentures are accepted for LAS due to their fixed-income nature and relatively lower risk.
Mutual funds and other investments like exchange-traded funds (ETFs) may also be pledged to secure a loan, offering more diversification in collateral options.
Applying for LAS is straightforward, but understanding each step will ensure smooth processing. Below is the procedure involved:
Step 1: Choose a Lender
Select a financial institution that offers LAS. Check for terms like interest rates, repayment options, and loan tenure.
Step 2: Pledge Your Securities
Choose the securities you want to pledge. Make sure they are eligible and meet the lender’s requirements.
Step 3: Submit Required Documents
Provide necessary documents such as KYC, proof of ownership, and income details (if applicable).
Step 4: Loan Approval and Disbursement
After assessing your application and securities, the lender will approve the loan and disburse the funds. Now that you understand the process, let’s take a look at the key documents required:
Documents Required
Proof of identity (Aadhaar card, passport, voter ID)
Proof of address (utility bills, bank statement)
Proof of income (if necessary)
Demat account details for the pledged securities
Interest rates for LAS are determined based on several factors. Here’s what affects the rates:
Interest rates for LAS are generally determined based on the value of the pledged securities, the LTV ratio, and the risk profile of the borrower. Market conditions and the type of collateral can also influence rates.
The interest rates for LAS typically range from 9% to 15%, depending on factors like the type of securities pledged, the loan amount, and the financial institution.
LAS provides numerous benefits. Here are some reasons why this is a preferred borrowing option:
With LAS, you can access funds quickly without having to sell your securities. This is ideal when you need liquidity but want to retain ownership of your assets.
Unlike selling your securities, LAS allows you to keep ownership. You benefit from any appreciation in the value of your securities while using them as collateral.
Since the loan is secured by collateral, LAS usually carries lower interest rates compared to unsecured loans, making it a cost-effective borrowing option.
While LAS offers several advantages, it also comes with certain risks. Below are the key considerations:
The primary risk of LAS is the possibility of losing your pledged securities if you are unable to repay the loan. In such cases, the lender has the right to sell the pledged assets to recover the loan amount.
If the value of the pledged securities falls significantly, the lender may request additional collateral or even reduce the loan amount. This can lead to margin calls, requiring you to bring in more assets to maintain the loan.
Loan Against Securities (LAS) allows borrowing against pledged assets like stocks or bonds, providing liquidity with competitive rates, but carries risks, especially in volatile markets.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
A Loan Against Securities (LAS) allows borrowing funds by pledging financial assets like stocks, bonds, and mutual funds as collateral.
LAS provides quick funds, lower interest rates, and flexibility in usage.
The loan amount is determined based on the Loan-to-Value (LTV) ratio, which is a percentage of the pledged security's market value.
Securities like stocks, bonds, mutual funds, fixed deposits, and government securities can be pledged.
Risks include margin calls due to falling asset values and the possibility of losing pledged assets in case of loan default.
Yes, private limited companies can avail loans against their securities for business needs.
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Posted on 18 Aug
Geetanjali Lachke
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