A loan against securities (LAS) is a type of loan where borrowers pledge their financial assets, such as stocks, mutual funds, bonds, or other securities, as collateral to secure a loan from a financial institution.
This type of loan provides borrowers with liquidity without needing to sell their securities.
Here are key aspects of loans against securities:
1. Collateral:
Securities, typically held in dematerialized or electronic form, serve as collateral for the loan. The lender holds these securities until the borrower repays the loan.
2. Eligible Securities:
Different financial institutions may have varying criteria for eligible securities. Commonly accepted securities include shares, mutual funds, bonds, and other marketable securities.
3. Loan Amount:
The loan amount is determined based on the market value of the pledged securities. Lenders usually offer a percentage of the market value as the loan amount, known as the loan-to-value (LTV) ratio.
4. Inerest Rates:
Interest rates on loans against securities may be lower compared to unsecured loans because the loan is secured by the collateral. Rates can be fixed or floating and vary among lenders.
5. Loan Tenure:
The loan tenure is the period for which the loan is granted. It can range from a few months to several years. The borrower repays the loan amount along with interest within the specified tenure.
6. Purpose of Loan:
Borrowers can use the funds from a loan against securities for various purposes, including meeting short-term liquidity needs, making a down payment on a property, or funding other financial requirements.
7. Risk of Margin Calls:
If the value of the pledged securities falls significantly, the lender may issue a margin call, requiring the borrower to either deposit additional securities or repay a portion of the loan to maintain the required LTV ratio.
8. Flexibility:
Loans against securities offer flexibility, allowing borrowers to continue benefiting from potential market gains on their securities while using the liquidity provided by the loan.
9. Creditworthiness:
The creditworthiness of the borrower is a factor in determining the loan amount and interest rates. However, loans against securities are generally more accessible than unsecured loans, as the collateral mitigates the lender's risk.
10. Liquidation of Securities:
In the event of non-repayment, the lender has the right to liquidate the pledged securities to recover the outstanding amount. This is typically a last resort after providing the borrower with opportunities to address the repayment.
11. Regulatory Compliance:
Loans against securities are subject to regulatory guidelines, and lenders must adhere to applicable laws and regulations governing such transactions.
12. Tax Implications:
Borrowers should consider the tax implications of loans against securities, including potential capital gains or losses and the interest paid on the loan
