What are Loans against Securities (LAS) and why do we get better Interest rates on them?

Banks offer loans to help people like you and I fulfill their financial requirements, and there are a whole bunch of different kinds of loan products available today, both secured and unsecured, and which can be utilized for various purposes. Interest rates, tenures, total loan amounts disbursed, etc. depend on many factors of eligibility and repayment ability (which is usually determined through your CIBIL score). But there is another major factor that can enable more favorable terms for your loan – whether or not your loan is given against a security.

A security is basically an item, asset, policy, documents, etc. that have a certain value that can be placed as collateral against a potential default on repayments on your part. Suppose you take a secured loan like a car loan, against the collateral of the car itself – if you default on repayments in a way that coincides with terms for the same in your loan agreement – the lender will have the right to cease your vehicle and recover its losses. The same goes for home loans, where the bank can recoup its losses through ceasing your home and placing it for open sale on the market, etc.

It isn’t the best feeling when you default on repayments and have to surrender something of value, but the terms on which you will get the loan will be more favorable if you show the bank that you are so confident in your ability to repay that you are even placing your home / vehicle / assets on the line.

Here’s a list of other assets / securities that can be placed as collateral against your loan:

     -      Mutual Funds.
-      Non-Convertible Debentures.
-      NABARD Bonds.
-      LIC policies.
-      UTI Bonds.
-      KSC / KVP (in DEMAT form)
-      Demat shares.

Features of Loans against Securities

Given below are some of the general features and benefits of Loan against Securities

     -      In the bank or financial institution where you pledge any of the above assets, an overdraft facility will be created for you to use.
-      The total amount of this overdraft depends on the value of the pledged asset – and will be in proportion to the loan eventually disbursed.
-      Loans taken against securities usually have the added benefit of being disbursed through a special current account that’s opened in your name – and interest starts to accrue after you start using the money.
-      Loans against securities are treated as secured loans and thus carry lower rates of interest and more favorable terms for the borrower.
-      Banks usually charge around 2% processing fees for LAS.
-      Higher loan amounts are generally disbursed in the case of secured loans versus unsecured loans.
-      Prepayment charges generally do not apply in the case of LAS.
-      Another excellent benefit of taking out a loan against securities is that, if you’re able to pay it back on time in accordance with the terms on which you took the loan – you also get back the security that you’d initially pledged – and will be eligible for all the benefits carried by the security. It’s just like placing the security in a temporary state of suspension till you get your other work done for which you needed a loan, and then enjoy the financial product / asset / security that you had placed as collateral.

Documents required for Loan against Securities

Here’s a list of documents that you will need when applying for a Loan Against Security (LAS):

   -      Proof of Identity: Could be anything that contains your name as an official record – passport, PAN card, driving license, etc.
-      Proof of address: Could be anything that contains your official correspondence address (as on official records) – passport, driving license, etc.
-      Proof of office address: This is for non-salaried people who have their own undertakings – office address proof can be phone bills, internet bills, etc. made out to the company as an entity conducting business from “x” office address. Must be the official correspondence address of an operations / head office.
-      Proof of business incorporation: This is for non-salaried people who have their own undertakings – to prove that the business actually exists – an incorporation certificate / other document issued by a competent authority confirming the existence of the business must be submitted.
-      PAN Card: The Permanent Account Number assigned to you must be communicated to the bank.
-      Photographs: Recent passport sized and / or stamp sized photographs, depending on the bank you borrow from.
-      Bank statements: For the last 6 months, must be attested.
-      Cancelled Cheque: A cancelled cheque from your bank account must be submitted.
-      Demat Account Statement.
-      Income proof: Proof of income from salary slips, balance sheet of business, etc.