The choice between a loan against securities (LAS) and a personal loan is rapidly gaining traction nationwide. This is happening as aspirational borrowers are seeking the best fit for their financial needs. Experts emphasise the significance of understanding both cost and associated risks before making a borrowing decision.
Elucidating on the same, Animesh Hardia, Senior Vice President, Quantitative Research at 1 Finance, says: “While both types of loans have high borrowing costs and should generally be avoided, in the event of an emergency, a personal loan (with an interest rate of less than 12-14%) should be favoured over a loan against securities. Loans against securities must maintain an LTV of approximately 50%. And with them, you risk sudden repayment demands if markets fall, making them less predictable in emergencies.”
That said, for borrowers with stable portfolios and non urgent funding needs, LAS can still be a cost-efficient choice when used prudently. The final decision in this regard must be taken after due consideration and discussion with a certified financial advisor.
Interest rates and borrowing costs
Loan against securities generally comes with lower interest rates. These rates often start from around 9-11%. For example, Axis Bank provides LAS starting at 11.5% per annum. In contrast, personal loan rates range from 10-25% per annum primarily depending on the credit profile, credit score and the associated lender risks. This makes LAS a more efficient solution for those with pledged assets.
Collateral and loan amount
Both types of loans have their pros and cons. LAS requires pledged securities i.e., shares, mutual funds, bonds permitting borrowers to retain ownership and even earn dividends while availing funds. Generally lending institutions advance 50-70% of the asset value. Personal loans on the other hand being unsecured, depend on income, repayment history, credit scores often leading to smaller loan amounts but with no assets at risk.
Flexibility and repayment
Loans against securities often offer flexible repayment opportunities. Monthly interest payments with principal due later or EMIs over longer tenures, up to 15 years for some lending institutions. Personal loans generally cap tenure at five years, with fixed personal loan EMI structures and more rapid turnarounds.
Risk considerations
LAS as a loan product carries several market risks, if collateral value drops. Lenders then may issue a margin call, requiring repayment or additional collateral. There is also a chance of forced liquidation and an unforeseen crisis. Personal loans on the other hand lack collateral risk but often have higher interest and stricter credit scrutiny.
Loan against securities vs personal loan
| Features | Loan against securities | Personal loan |
|---|---|---|
| Interest rates | Lower (starts from 9–11% p.a.) | Higher (10–25% p.a.) |
| Collateral | Required (shares, mutual funds, bonds) | Not required (unsecured) |
| Loan amount | Based on asset value (50–70% of pledged value) | Based on income and credit score |
| Repayment flexibility | Flexible tenure and repayment options | Fixed EMIs with shorter tenure |
| Risk involved | Market risk; margin calls if asset value falls | No asset risk but higher scrutiny |
Note: Features above are illustrative and may vary by lender. LAS is cost-effective but requires pledged assets. Personal loans are unsecured, quicker, and better for small, urgent needs. Choose based on eligibility, urgency, and risk comfort.
Therefore, borrowers with a big investment portfolio aspiring to secure low cost, flexible credit may consider LAS more advantageous. Whereas, for those borrowers who don’t have a lot to pledge, needing small sums with rapid disbursal a personal loan remains a prudent alternative, albeit a higher cost.
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