Loan-Against-Securities
Loan Against Securities (LAS) is a smart way to access funds from your bank if you are in urgent need of money. In such loans, you can use your securities as collateral and get funds in the form of an overdraft facility, which means you have to pay interest on the utilised amount for the utilised duration.
While the loan process is easy, many applicants may overlook key details and make avoidable mistakes. This blog highlights some of the most common errors and how you can steer clear of them to make the most of your LAS.
Common Mistakes to Avoid When Taking a Loan Against Securities
Below are some very common mistakes that applicants need to avoid when taking out a Loan Against Securities:
- Not Clearly Understanding The Loan Terms
A Loan Against Securities is typically offered as an overdraft facility. Failing to understand the terms—such as interest calculation, usage limits, or renewal conditions—can lead to confusion and mismanagement. Don’t hesitate to ask your bank for clarification. Being well-informed helps you use the facility wisely and avoid unnecessary financial complications.
- Not Checking Interest Rates and Fees
The next big mistake you may commit is avoiding checking the interest rates and fees related to the loan. It can impact your pocket and may result in expenses that might strain your financial situation in the future. Consider your bank and check the interest rates they offer when making a final decision. Moreover, it is important to be aware of any charges like processing fees or administrative costs, that may somehow impact your planning.
- Neglecting Market Conditions
Since these loans are backed by your securities, which means that your investments serve as a collateral for the loan amount you borrow. The value of funds can change along with market dynamics and it is important to acknowledge these fluctuations to avoid risks. It is also better to stick to an approach by borrowing what you can comfortably repay in case the value of your investments goes down.
- Failing To Create a Repayment Plan
Overlooking the planning for repayment is a common mistake people make in their loan journey. Without a thought out strategy for repayment in place, you could encounter consequences such as penalties, increased interest rates or even harm to your credit rating.
- Ignoring Tax Implications
Many borrowers overlook the tax aspects of a Loan Against Securities. Interest paid on the overdraft is not eligible for tax deductions. Additionally, if you sell securities to repay the loan, you may incur capital gains tax, depending on the holding period and type of asset. Understanding these tax implications in advance can help you make more informed financial decisions and avoid unexpected liabilities.
- Underestimating the Impact of Collateral
When you borrow against your securities such as Mutual Funds, SGB, shares, and insurance policies, as collateral and struggle to repay them on time, the bank can sell off your collateral to make up for the utilised amount. This is a risk that many borrowers overlook, thinking they can pay back the loan without impacting their investments. To minimise this mistake, it’s helpful to grasp the significance of your assets and make sure that your payment strategy fits well with your objectives. By doing so, you can prevent loss of your investments in case unexpected situations impact your capability to settle the debt.
Conclusion
Taking a Loan Against Securities can be a wise way to avail funds without selling your investments, but it comes with responsibilities. To make the most of it, avoid common mistakes like overleveraging, ignoring interest rates, or failing to monitor your portfolio’s value. Always read the terms carefully and stay informed about your loan’s impact on your investments.
With proper planning and awareness, you can use this facility to your advantage without risking your financial stability. At the end, remember to stay disciplined and make sure the loan works for your goals.
