Acquiring a loan can be a daunting task. However, if one has securities – shares, mutual funds, or bonds – then they can avail a loan against that. Loan against securities or LAS is a type of secured loan where one can receive funds by pledging securities to the lender. The securities are converted into a liquid asset for the lender, making it easier for the borrower to avail funds. In this article, we will discuss the loan against securities interest rates, trends and insights and provide generic information on the industry’s standard practices.
What is Loan Against Securities?
Loan against securities is a type of secured loan where one can avail of financing by mortgaging securities such as shares, mutual funds, or bonds. This loan is ideal for individuals who hold securities but require liquidity for short-term needs. The securities pledged are kept as collateral by the lender, who has the right to liquidate the securities to recover the loan amount in case of default.
Loan Against Securities Interest Rates
The interest rate for the loan against securities varies from lender to lender. Public sector banks generally offer lower interest rates compared to private sector banks. These interest rates can range between 8.5% to 15% depending on the lender. One may compare the interest rates offered by different lenders to assess the best interest rate and terms for their LAS loan. It is important to note that the interest rates for LAS loans are usually lower compared to personal loans, as the former is a secured loan.
Trends and Insights for Loan Against Securities Interest Rates
The interest rates for loan against securities are dependent on several factors such as the market value of the securities, the type of security pledged, and the lender’s policies.
Type of security pledged: Lenders usually offer LAS loans against shares, mutual funds, or bonds. The interest rate on LAS loans is often determined by the type of security pledged. Shares are considered riskier compared to bonds, which offer lower interest rates.
Market value of securities: The market value of traded securities fluctuates depending on market conditions. The interest rate of the LAS loan is calculated based on the current market value of the securities pledged. If the market value of the securities falls below a specified threshold, the lender may ask the borrower to top up the securities.
Loan to Value Ratio: The loan to value or LTV ratio is the ratio of the loan amount to the market value of the securities pledged. Lenders specify a maximum LTV ratio for LAS loans. Higher LTV ratios indicate a higher risk for the lender, which may result in higher interest rates for the borrower.
Loan tenure: The loan tenure for LAS loans is usually between one to five years. A shorter tenure may result in a lower interest rate. Lenders may charge a higher interest rate for a longer loan tenure.
Nature of lender: Public sector banks usually offer lower interest rates compared to private sector banks. Non-banking financial companies may also offer LAS loans, and their interest rates may be higher compared to banks.
Negotiation: Lenders usually provide a range of interest rates to borrowers. One may negotiate with the lender to obtain a better interest rate. The borrower must have a good credit history and should have a clear understanding of the lender’s policies.
Prepayment charges: Prepayment is the process of repaying the loan amount before the end of the loan tenure. Lenders may levy prepayment charges on prepayment of LAS loans. Borrowers may negotiate for lower prepayment charges or opt for a lender who does not levy prepayment charges.
Conclusion
Loan against securities is an attractive financing option for individuals who hold securities such as shares, mutual funds, or bonds. The loan is secured, and the interest rates are usually lower compared to personal loans. The interest rates for LAS loans are dependent on several factors such as the type of security pledged, market value of securities, loan to value ratio, nature of lender, and loan tenure. It is essential to compare the interest rates offered by different lenders and negotiate with the lender to obtain a better interest rate. One must also understand the lender’s policies on prepayment charges before availing of the loan.