Personal Finance Guide

Loan Against Securities: A Smarter Way to Meet Financial Needs

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September 25, 2024

What is a Loan Against Securities (LAS)?
Factors to Consider When Taking a Loan Against Securities
Why Could a Loan Against Securities Be a Better Option Than Selling Them?
The Right Time to Get LAS
LAS: A Safety Net for Unexpected Costs
Consult a Financial Professional

When faced with a financial need, many investors may consider selling their stocks to raise funds. Taking a Loan Against Securities (LAS) could be a better option. This option allows you to maximize the value of your investments without having to sell them. Let's look at why LAS may be a better option and what considerations to consider while choosing this financial instrument.

What is a Loan Against Securities (LAS)?

A Loan Against Securities (LAS) is a secured loan in which you use your financial assets, such as stocks, mutual funds, bonds, or other securities, as collateral to borrow money. The loan amount is often a percentage of the market value of the securities pledged, allowing you to gain access to liquidity without having to sell your investments.

Factors to Consider When Taking a Loan Against Securities

Loan to Value Ratio (LTV)

The LTV ratio impacts the amount you can borrow against your securities. Lenders typically provide between 50% and 80% of the value of your securities. It is critical to understand this ratio because it affects the amount of money you may access.

Interest Rates

LAS normally has lower interest rates than unsecured loans, however, the rate may vary according to the type of securities pledged and the lender's policies. Compare rates from several lenders to obtain the best deal.

Market volatility

The value of your securities may fluctuate, affecting the LTV ratio. In a volatile market, your pledged securities may lose value, causing the lender to want extra collateral or repayment.

Tenure and repayment flexibility

LAS frequently offers flexible repayment choices, letting you select a term that fits your financial circumstances. However, you should be aware of any prepayment charges or penalties for early repayment.

Pledged securities

Not all security is treated similarly. Lenders frequently prefer high-quality blue-chip stocks and government bonds over less liquid or volatile instruments, which may not be approved or fetch higher interest rates.

Why Could a Loan Against Securities Be a Better Option Than Selling Them?

Continue Earning Returns: By not selling your securities, you can profit from dividends, interest, and capital gain, preserving your investment's growth potential.
Avoid the Capital Gains Tax: Selling securities may result in capital gains tax, which might drastically lower your net returns. LAS allows you to access liquidity while avoiding this tax liability.
Leverage existing assets: LAS enables you to use your existing portfolio to satisfy financial demands while maintaining your long-term investing goal. This can be especially beneficial if the market is predicted to do well.
Lower the cost of funds: LAS frequently has lower interest rates than other types of borrowing, making it a cost-effective way to raise capital.
Preserve Portfolio: Selling assets, particularly during a market drop, can result in losses. LAS permits you to keep your capital until the market rebounds, potentially preventing losses.

The Right Time to Get LAS

During the bull market

In an upward market, the value of your securities rises, allowing you to borrow more money. Furthermore, if asset prices continue to rise, you will profit from capital appreciation while servicing your debt.

During the bear market

When the markets are down, selling your securities may result in a loss. Instead, taking a LAS can provide the liquidity you require without forcing you to sell at a poor price. As the market rebounds, your stocks gain value, allowing you to repay the loan more comfortably.

LAS: A Safety Net for Unexpected Costs

When financial necessities occur, the inclination could be to sell investments for immediate cash. However, accepting a Loan Against Securities (LAS) can be a more strategic strategy, allowing you to meet your financial demands while leaving your investments intact.

Assume you require ₹10,00,000 for your daughter's education. You have a portfolio worth ₹20,00,000. Here's how the two options could play out:

Option 1: Selling investments

Action	Growth	Portfolio Value	After 1 Year	Loan Interest	Net Gain
Sold ₹10L of investments	15-18%	₹10L	₹11.5-11.8L	₹0	₹1.5-1.8L

You sell ₹10,00,000 in securities, resulting in a portfolio of ₹10,00,000.
If the market grows at 15-18% over the next year, your remaining portfolio might increase to ₹11,50,000 - ₹11,80,000.
However, you lost out on prospective gains on the ₹10,00,000 you sold, which could have increased by ₹1,50,000 to ₹1,80,000.

Option 2: Taking a Loan Against Securities (LAS)

Action	Growth	Portfolio Value	After 1 Year	Loan Interest	Net Gain
Took LAS for ₹10L	15-18%	₹20L	₹23L-23.6L	₹1L	₹2L-2.6L

You borrow ₹10,00,000 against your portfolio.
The LAS normally enables you to borrow 50-60% of your portfolio worth, making your ₹20,00,000 portfolio acceptable collateral.
The interest rate on the LAS is 10%.
If the market grows by 15-18%, your portfolio might increase to ₹23,00,000 - ₹23,60,000.
The loan (₹10,00,000 at 10%) would cost ₹1,00,000.
After loan interest is paid, the net portfolio value is between ₹22,00,000 and ₹22,60,000, resulting in a net gain of ₹2,00,000 to ₹2,60,000.

How to Get a Loan Against Securities Using the PA Wealth App

Taking out a Loan Against Securities is made simple through the PA Wealth App. Just follow these easy steps:

Open the PA Wealth App on your phone.
Scroll down to the Loan Against MF option and click on it.
Once the page opens, select Apply Now.
Enter your phone number and click Continue.
Input the OTP received on your registered number.
Click on Check Eligible Limit.
Enter your email address and input the OTP sent to your email.
Provide your PAN and Date of Birth, then confirm the PAN details.
Click on Get My Portfolio to check your portfolio.
If you want to add more securities, select Get More Portfolio; otherwise, proceed to the next step.
Complete the process and take out the loan against your Mutual Fund (MF) investments.

Conclusion

Selling your investments may give immediate funds, but it may also result in losing out on possible market profits. By taking out a Loan Against Securities, you can fulfil your financial demands while allowing your portfolio to continue growing, potentially paying the cost of the loan and leaving you with a higher net gain in the long term.

Consult a Financial Professional

While LAS has several advantages, it is critical to approach this choice with a thorough understanding of the dangers associated. Consulting financial professionals such as PA Wealth can assist you in determining whether LAS is appropriate for your financial goals and risk tolerance, allowing you to make an informed decision. PA Wealth App allows you to apply for a LAS with a few clicks in case of emergencies.

In a nutshell, a Loan Against Securities can effectively meet short-term financial demands while protecting your long-term investment portfolio. By carefully examining the above criteria, you can use LAS to your advantage while avoiding the possible downsides of selling your shares too soon.

Drop us your query at – info@pawealth.in or Visit pawealth.in

Disclaimer: The report only represents the personal opinions and views of the author. No part of the report should be considered a recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

Loan Against Securities: A Smarter Way to Meet Financial Needs

What is a Loan Against Securities (LAS)?