Rules to Follow While Applying For Loan Against Securities (LAS)
Financial exigencies often arrive unannounced, demanding a seamless influx of capital. In such unforeseen circumstances, procuring liquid funds can pose a formidable challenge. Typically, individuals are left with two choices: liquidating their long-term investments or resorting to high-interest personal loans. Yet, if you aspire to devise financial solutions that preserve your investments and evade the clutches of high-interest debts, there exists a superior option. The option of ‘loan against shares and securities.’ This is also typically known as ‘Loan Against Securities’ or LAS. Today, we’ll learn about a few rules to follow while applying for LAS.
This clandestine avenue offers unparalleled flexibility, extensively harnessed as a borrowing conduit in India. By pledging an array of assets – from equity shares and mutual funds to bonds, bank deposits, and insurance policies – you can unlock a concealed wellspring of financial resources. This unique lending approach caters to those in dire need of immediate funds while nurturing the safeguarded embrace of their investment portfolio.
However, should you venture down this covert path of ‘loan against securities,’ it is imperative to unravel a few cryptic nuances, ensuring an untroubled borrowing expedition. Thus, let us explore a few rules to follow while applying for LAS or Loan Against Securities.
What is Loan Against Securities?
Loan Against Securities (LAS) is a unique financial arrangement where borrowers use their stocks, mutual funds, bonds, and other financial assets as collateral to secure a loan from a lender. LAS provides individuals with the ability to tap into the value of their investments and access immediate cash without the need to sell their securities.
The loan amount granted under LAS is determined by the lender, calculated as a percentage of the market value of the pledged securities. This calculation takes into account several factors, including the type of securities, the borrower’s creditworthiness, and the current state of the stock market.
LAS is gaining popularity as it offers a more flexible and cost-effective borrowing option compared to traditional loans like personal loans, business loans, or credit cards. It is particularly advantageous for investors with a substantial portfolio of securities who require quick access to funds for emergencies or opportunities. Additionally, LAS is a suitable choice for those who prefer not to sell their securities due to tax implications, market conditions, or sentimental value. Another appealing aspect is that Loan Against Securities interest rates are usually lower, compared to other unsecured loans, making it an attractive choice for borrowers looking to minimize borrowing costs.
How Does LAS Work?
Opening a demat account not only grants you access to the world of stock trading but also unlocks the potential for a valuable financial tool: the loan against securities. Here’s a closer look at how this often-overlooked benefit functions:
Similarity to Traditional Loans
A loan against securities operates much like any other loan. When you apply, you can secure an amount equivalent to the current value of the shares you hold in your demat account.
Retaining Share Profits and Benefits
What sets these loans against stock holdings or mutual funds, apart is that as the borrower, you continue to enjoy the perks of your shares. This includes profits, dividends, and bonuses throughout the loan tenure, ensuring you don’t miss out on potential gains.
Long Term Investment Strategy
If you’ve adopted a long-term investment approach in the stock market, leveraging a loan against your equity holdings can be a strategic move. It allows you to address immediate financial needs without jeopardizing your overarching investment goals.
Fulfilling Shortfall Fund Requirements
These loan against security serve as a lifeline during financial shortfalls, providing investors with the necessary funds while preserving their long-term wealth-building strategy. It’s a balancing act that caters to both immediate and future financial goals.
Rules to Follow While Applying for LAS
When getting a loan against stocks, it’s crucial to adhere to certain rules and guidelines to ensure a smooth and advantageous borrowing experience. Here are some key rules to follow while applying for LAS:
Select the Right Lender
Choose your lender carefully, as it can significantly impact your borrowing terms. Look for a lender that accepts a broad range of financial assets as collateral, as this can enhance your creditworthiness.
Maximize Collateral Variety
Utilize a diverse portfolio of financial assets as collateral. A wider range of approved securities can strengthen your loan application and improve your borrowing capacity.
Understand the Loan-to-Value Ratio
Familiarize yourself with the loan-to-value (LTV) ratio, which determines the maximum loan amount you can obtain based on the value of your securities. Ensure you know the specific LTV requirements of your lender.
Choose the Right Securities
Select securities that are eligible as collateral and consider their liquidity and market volatility. Blue-chip stocks and government bonds are often preferred choices due to their stability.
Evaluate Flexible Repayment Terms
Since loans against securities are secured, they offer more flexibility than personal loans. Seek a lender that offers flexible repayment options tailored to your financial situation. As this repayments can be a strain on your finances, this makes it one of the most important rules to follow while applying for LAS.
Understand Overdraft Terms
Familiarize yourself with the terms of the overdraft facility, including the approved credit limit. Ensure that you do not exceed this limit when accessing funds from the overdraft facility.
Beware of Hidden Charges
Take the time to learn about any hidden charges associated with your loan or overdraft facility. These charges may include maintenance fees, processing fees, and additional interest if the approved limit falls short of the loan amount. Understanding these costs can help you manage your loan efficiently.
Take Note of Documents Required
To ensure a seamless borrowing experience, it’s advisable to have essential documents such as KYC documents, income proof, Demat account details, etc., ready. Also, taking note of loan against shares eligibility, is a good idea. Different lenders may have varying document requirements, but typically, a loan against securities necessitates only a few basic documents. Once you provide these documents and meet the lender’s specified conditions, your loan can be processed.
Things to Consider While Applying for LAS
Here are some things to consider while applying for LAS:
- Check Your Eligibility: Before applying for a loan against securities, make sure you meet the necessary criteria. Typically, lenders require applicants to be at least 21 years old.
- Pick a Diverse-friendly Bank: Choose a lender that accepts a variety of investments, such as mutual funds, IPOs, and insurance policies. Look for flexibility in the types of securities they consider.
- Opt for High Sanction, Low Interest: Many Indian lenders offer such options based on your securities. You can avail a loan against mutual funds investment from ₹25,000 to ₹5,00,00,000 with a loan against mutual funds (LAMF) at smallcase
- Flexible Repayment Terms: Select a lender offering a repayment tenure tailored to your needs, typically ranging from 1 to 3 years. Match the repayment period with the loan amount you’ve taken.
To Wrap It Up…
In conclusion, when obtaining a loan against securities, it’s essential to consider these factors. By adhering to these rules, you can borrow within your financial limits, effectively manage risks, and reduce your overall borrowing costs in a seamless manner. Loan Against Mutual Funds (LAMF) via smallcase can also be a smart move in optimizing your loan against securities strategy, offering a structured approach to potentially enhance your investment returns.
As always, please do your own research and/or consult a financial advisor before investing.
FAQs
The RBI permits using only Group I stocks as collateral for loans exceeding five lakhs in the case of loan against mutual funds or other securities. Group I securities are those that have traded on at least 80% of the days in the preceding six months and rank within the top 1% of stocks with the lowest cost impact.
The loan against securities process involves:
1. Document collection.
2. Lender selection.
3. Application submission.
4. Pledging eligible securities.
5. Evaluation for loan amount.
6. Loan approval and terms.
7. Disbursement to your account.
8. Timely repayment.
9. Ongoing monitoring of market conditions.
Specific procedures may vary by lender.
To qualify:
1. You must be an Indian citizen.
2. Your age must range from 18 to 65 years.
3. You can be either salaried or self-employed.
4. You must possess a minimum security worth Rs. 50,000.
To apply for a securities-backed loan from a bank, you should be an Indian citizen or resident, at least 18 years old, with a Demat account and eligible securities as collateral. A positive credit score and repayment history are also essential.
Loan Against Securities (LAS) is a unique financial arrangement where borrowers use their stocks, mutual funds, bonds, and other financial assets as collateral to secure a loan from a lender with a subsequently lower loan against equity shares interest rate.
All About Loan Against Securities & Loan Against Mutual Funds on smallcase –
smallcase offers quick and easy disbursement of loans against securities ( LAMF), all about eligibility, documents, features and benefits of Loan against mutual funds and the process for applying for loan is just one click away –
