Taking a loan is a complex decision. Borrowers spend a lot of time in contemplating this option. Initially, they take advice from family, friends and colleagues before deciding to go in for a loan. Then, they weigh the pros and cons of each type of loan that suits their requirement and finally they look into the paperwork that needs to be completed for availing one.
However, at times even after making all these efforts, individuals looking for loans to meet sudden and small money requirements for diverse purposes end up taking expensive personal loans from lenders. In fact, as consumers remain unaware of cheaper alternatives to personal loans, they continue to opt for them and end up paying huge amounts as interests on loans.
But, today the market is flooding with alternative ways to raise finance for miscellaneous purposes at low interest rates such as taking loans against securities, loans against fixed deposits in banks, loans against cars, gold loans, etc. As most of these options are secured loans, the interest rates at which they are provided are much less than the interest rates on personal loans.
What are loans against securities (LAS)?
Loans against securities are loans which are availed from banks by pledging securities such as equity shares, government relief bonds, RBI bonds, life insurance policies, mutual fund units, UTI bonds, gold deposit certificates, gold ETFs, kisan vikas patra, national savings certificates etc to them. The securities against which loans are to be availed should be owned either by the borrower or by his close relatives (called third party pledgers).
When a borrower's loan application (for loans against securities) is accepted, an account in his/her name is opened in the bank, with an overdraft limit based on the amount of the loan. The borrower is provided a cheque book and an ATM card on the opening such an account. Most banks provide these loans in the form of an overdraft only.
By pledging the securities, a borrower can take care of his/her urgent cash needs while preserving his/her investments as the shares are only blocked by the lender but they remain in borrower's ownership. It means that even after pledging the securities, borrowers continue to enjoy all shareholder benefits like dividends, bonuses etc.
Every lender has its own approved list of securities which is accepted by them for granting loans. The list is revised and updated periodically according to the internal policies of the lender. Usually, shares of blue chip companies, government bonds and other state owned securities are accepted by all.