A Loan Against Securities (LAS) is a convenient way to access funds without selling your investments. It allows you to pledge your shares, mutual funds, or bonds as collateral while continuing to benefit from market appreciation. However, many applicants make avoidable mistakes that can impact their borrowing experience and financial stability. To ensure a smooth process and maximise the benefits of this loan, here are the top five common mistakes to avoid when applying for a Loan Against Securities.
1. Not Understanding the Loan-to-Value (LTV) Ratio
One of the biggest mistakes borrowers make is not understanding the Loan-to-Value (LTV) ratio. Lenders typically offer a loan based on a percentage of the market value of pledged securities. This percentage varies depending on the type of security and the lender’s policies.
For instance, mutual funds, shares and bonds may have different LTV. Not being aware of the LTV ratio can lead to unrealistic loan expectations. To avoid this, research the LTV policies of reputed financial institutions like ICICI Bank before applying. This will help you determine how much you can borrow and plan your finances accordingly.
Moreover, LTV ratios can change based on market conditions. If market volatility increases, lenders may adjust their policies, which could impact the loan amount available to you. Ensuring that you stay updated with these changes and understanding how they affect your loan eligibility is crucial for financial planning.
2. Ignoring Market Volatility and Margin Calls
Market fluctuations directly impact the value of pledged securities. If the market value of your securities drops significantly, your lender may issue a margin call, requiring you to either pledge additional securities or repay part of the loan to maintain the required LTV.
Many borrowers overlook this risk, assuming that their securities will always maintain or increase in value. To mitigate this, ensure you maintain a buffer by pledging high-value securities and tracking market trends. A diversified portfolio with stable securities can reduce the chances of margin calls and prevent financial stress.
Additionally, it is beneficial to have a contingency plan in case a margin call arises. Keeping some additional liquid assets aside can help you manage unexpected market movements without the need to sell your investments prematurely. Understanding how margin calls work and preparing in advance can safeguard your finances.
3. Not Comparing Interest Rates and Other Charges
Interest rates on Loans Against Securities can vary from lender to lender. Many applicants make the mistake of accepting the first offer they receive without comparing interest rates, processing fees, and other charges.
For example, a competitive interest rate from a reputed financial institution can significantly reduce the cost of borrowing over time. Additionally, some lenders charge processing fees, documentation fees, and renewal charges, which can add to the overall loan cost. To avoid overpaying, compare multiple lenders and choose one that offers the best terms with transparent fee structures.
Beyond interest rates, borrowers should also check for hidden charges or additional costs associated with prepayment, renewal, or foreclosure. A seemingly low-interest rate could be offset by high processing fees or stringent repayment conditions. Evaluating the complete cost structure can save you from unexpected financial burdens. Major banks such as ICICI Bank offer Loan Against Securities with attractive interest rates.
4. Over-Leveraging and Borrowing More Than Needed
A Loan Against Securities provides quick liquidity, but borrowing more than necessary can lead to financial strain. Some applicants pledge excessive securities to access a higher loan amount without considering their repayment capacity.
Over-leveraging can be risky, especially during market downturns when the value of securities may drop. If you fail to meet margin calls, the lender may sell your pledged securities to recover the outstanding amount. To prevent this, assess your financial needs realistically and borrow only what you can comfortably repay.
Financial discipline is crucial when utilising LAS. Creating a structured repayment plan and understanding your risk appetite can help you use the loan responsibly without falling into excessive debt. Keeping track of your repayment schedule and maintaining a balance between loan utilisation and investment growth ensures a sustainable financial approach.
5. Not Understanding the Repayment Terms and Conditions
Many borrowers focus only on the loan amount and interest rates while overlooking the repayment terms. Leading banks such as ICICI Bank offer Loans Against Securities through overdraft facilities, where borrowers need to pay only the interest on the due date and can repay the outstanding principal amount at their convenience or when they have excess funds..
It is essential to read the terms carefully, including prepayment penalties, tenure options, and renewal policies. Leading lenders like ICICI Bank provide the loan as a No EMI OD facility with flexible repayment solutions. It allows you to pay only the interest on the due date while the principal can be paid at your convenience or when you have excess funds.
Understanding the consequences of defaulting on repayments is equally important. If you miss payments or fail to meet the lender’s requirements, it can lead to penalties, increased interest costs, or even liquidation of pledged securities. Reading the fine print and discussing any doubts with the lender before finalising the loan agreement ensures clarity and prevents financial setbacks.
How to Apply for a Loan Against Securities Wisely
To apply for LAS through a leading bank such as ICICI Bank, follow the steps below:
- Log in to your Internet Banking account.
- Navigate to ‘Cards and Loans’, select ‘Loans’, and choose ‘Loan Against Shares’.
- Select the shares you wish to pledge.
- Enter FATCA* details and accept the Terms & Conditions.
- Get instant access to funds through your Overdraft Account.
You can also apply for LAS through mobile banking apps like the iMobile app. Here’s how:
- Log in to the iMobile app.
- Go to ‘Get Instant Loans/Offers’ and select ‘Loan Against Shares’.
- Select your shares for pledging.
- Provide FATCA* details and accept the Terms & Conditions.
- Access funds through your new Overdraft Account.
To apply for Loan Against Mutual Funds, follow the steps below:
- Log in to your Internet Banking account.
- Navigate to ‘Cards and Loans’, select ‘Loans’, and choose ‘Loan Against Mutual Funds’.
- Select the type of Mutual Fund for lien marking.
- Enter additional information and FATCA* details.
- Calculate your final loan amount.
- Access funds through your new Overdraft Account.
You can also apply for Loan against Mutual Fund through mobile banking apps like the iMobile app. Here’s how:
- Log in to the iMobile app.
- Go to ‘Get Instant Loans/Offers’ and select ‘Loan Against Mutual Funds.
- Select the type of Mutual Fund for lien marking
- Enter additional information and FATCA* details.
- Calculate your final loan amount.
- Access funds through your new Overdraft Account.
Conclusion
A Loan Against Securities is a valuable financial tool that provides liquidity while keeping your investments intact. However, avoiding common mistakes like misunderstanding LTV ratios, ignoring market volatility, or over-leveraging is crucial for a stress-free borrowing experience. By choosing a reliable financial institution with competitive interest rates and flexible repayment terms, you can make the most of this funding option without jeopardising your investments.
If you are considering a Loan Against Securities, ensure you evaluate your financial requirements carefully and select a trusted lender that aligns with your needs. Making informed financial decisions can help you leverage this facility effectively and achieve your financial goals without unnecessary risks.
Hi, I’m Dev Kirtonia, Founder & CEO of Dev Library. A website that provides all SCERT, NCERT 3 to 12, and BA, B.com, B.Sc, and Computer Science with Post Graduate Notes & Suggestions, Novel, eBooks, Biography, Quotes, Study Materials, and more.
