A loan secured using securities allows a person to obtain funds based on their available financial instruments. Instead of having to sell the securities, the investor can create an opportunity to use the funds for various expenses or business needs.
With a loan secured through securities, the borrower remains the owner of the assets they are using as collateral, but the lender holds a lien against them until the debt is repaid. At the same time, the securities are still subject to fluctuations in their value, which can influence the loan amount a person has access to.
What do you need to know about Loans Against Securities?
A loan against securities is defined as a secured form of borrowing based on particular financial assets. Depending on the lender and the terms of the loan, these assets can vary.
- Listed equity shares
- Equity, debt, or hybrid mutual funds
- Bonds and other approved debt instruments
- Unit-linked insurance plans
- Eligible life insurance policies
- Fixed deposits
When determining a credit limit, the lender assesses the lien-marked securities’ category, their worth, liquidity, and how much they fluctuate in time. The lender then calculates the loan-to-value ratio applicable to the borrower.
In most cases, the borrower is not allowed to sell or transfer lien-marked securities without settling the corresponding debt and obtaining the lien release.
How Does the Facility Work?
The process of borrowing starts once the investor provides the lender with the information about the eligible securities. The lender performs the verification of the ownership and selects the assets that satisfy its criteria.
After the borrower has accepted the limit offered, it then secures the lender’s lien or pledge. The limit offered may then be drawn as a term loan, a line of credit, or a loan under the overdraft facility.
Under the loan limit of a line of credit, clients may draw the amount of money they want up to the limit and when they need it. Normally, the interest is calculated only on the amount that was borrowed and not on the approved limit.
So, if the investor in question received a credit limit of Rs. 10 lakh and borrowed only
How Is the Loan Amount Determined?
The sanctioned amount depends primarily on the market value of the securities and the applicable loan-to-value ratio. This ratio represents the percentage of an asset’s value that the lender is willing to provide as a loan.
Securities with relatively stable values may qualify for a higher ratio. Assets with greater price volatility may receive a lower ratio because their value can decline rapidly.
| Factor | Effect on the available limit |
| Security type | Different asset categories carry different lending margins |
| Current market value | A higher eligible portfolio value may support a larger limit |
| Price volatility | Highly volatile assets may receive a lower loan percentage |
| Portfolio concentration | A diversified portfolio may reduce concentration-related risk |
| Approved list | Only lender-approved securities can be pledged |
| Existing borrowing | Outstanding amounts reduce the remaining available limit |
Certain facilities may start from Rs. 25,000 and extend to substantially higher amounts. The final limit depends on the borrower’s portfolio, security type, and lender policies.
What Are the Main Benefits?
Borrowing against financial investments provides several potential benefits when used carefully.
No Immediate Sale of Investments
Investors can access funds without immediately selling eligible securities. This may help them avoid disrupting a long-term investment plan or selling assets during unfavourable market conditions.
However, retaining ownership does not guarantee returns. The value of shares and market-linked funds may rise or fall while they remain pledged.
Interest on the Utilised Amount
Where the facility operates as a line of credit, interest is usually charged only on the amount withdrawn. This can help borrowers manage costs by using only the amount required.
Flexible Withdrawals and Repayments
Borrowers may withdraw additional funds within the available limit, subject to maintaining the required collateral value. They may also make part repayments to reduce the outstanding principal and interest burden.
Limited Documentation
Since the loan is secured by financial assets, the application may require fewer documents than an unsecured loan. However, identity verification, ownership checks, and successful pledge creation remain necessary.
Digital Account Management
Many facilities can be managed online. Borrowers may be able to review their available limit, download statements, request withdrawals, make repayments, or seek the release of pledged securities through a customer portal.
Who Can Apply?
Eligibility conditions differ according to the security and lender. Individual applicants generally need to meet the following requirements:
- Indian residency
- Age between 21 and 90 years
- Salaried or self-employed status
- Ownership of eligible securities
- Successful Know Your Customer verification
- An active demat or mutual fund account, where applicable
Partnership firms, sole proprietorships, companies, Hindu Undivided Families, and other entities may also qualify under specific product conditions.
The lender may consider the applicant’s repayment capacity, credit profile, portfolio composition, and existing financial obligations before approving the facility.
Which Documents Are Usually Required?
Applicants should keep the following documents available:
- PAN card
- Aadhaar card, passport, voter’s ID, or driving license
- Address proof
- Demat account holding statement
- Consolidated mutual fund account statement
- Bank account details
- Relevant insurance or investment documents
Additional business documents may be necessary for non-individual applicants. Accurate records can help prevent delays during ownership verification and pledge creation.
How Can You Apply?
The application can generally be completed through a lender’s website, mobile application, or authorised branch.
The usual process involves:
- Completing the online application form.
- Verifying the registered mobile number through an OTP.
- Providing personal, employment, and security details.
- Uploading the required documents.
- Selecting securities from the approved list.
- Reviewing the provisional loan limit.
- Authorising the pledge or lien request.
- Signing the loan agreement.
- Requesting disbursal after approval.
The loan becomes available only after the pledge is successfully created and all verification requirements are completed.
What Happens If Security Values Fall?
Market-linked assets may reduce in value even after the issuing of loan. This results in an increase in the effective loan-to-value ratio, which may lead to a margin shortfall.
In that case, the lender may ask the borrower to furnish additional assets approved by them or to pay back a part of the loan within a certain period of time. If sufficient margin is not restored, the lender has the right to liquidate pledged securities partially or completely.
When taking loans against securities, borrowers should watch their investments and keep some buffer instead of exploiting the entire limit available to them. What they should keep in mind is the fact that no securities that they might need for any planned expenses should be pledged.
Conclusion
Investing loans can ensure liquidity without the need to sell any assets right away. However, its efficiency is determined by the required loan amount, repayment capabilities of the borrower, the quality of his portfolio, and his capability to handle market fluctuations.
When applying for these loans, one should pay attention to the comparison of Loan Against Securities Interest Rates as well as processing fees, renewal fees, prepayment terms, penalties, and margin.
