Emergencies come uninvited, and along comes the need for substantial funds. The financial pressures of a medical emergency, urgent home repair, last-minute wedding expenses, debt consolidation, spontaneous vacation, or a study abroad programme with its last date running out are huge. Even if it is not urgent, there are certain expenses you just cannot neglect.
Fortunately, today, you might find several loan options to borrow in times of need. Two of the most popular are a Personal Loan and a Loan Against Securities. Both loans have a common advantage: You can use the loan amount for any legal purpose. The following sections will help you determine the best funding option for your needs.
What is a Loan Against Security?
As the name suggests, a Loan Against Securities is a secured loan you can borrow against a security as collateral. The securities might include mutual funds, insurance policies, mutual funds, non-convertible debentures, NSCs, shares, etc. Each lending company has a list of securities they can accept as collateral. For example – Hero FinCorp offers a Loan Against Property. The interest rates are lower than Personal Loans due to a lower risk for the lender. The loan amount depends on the value of the securities presented as collateral. Income and credit scores are other crucial factors determining your loan amount and interest rates.
How is a Loan Against Security Different from a Personal Loan?
Are you confused between borrowing a Personal Loan or a Loan Against Securities? You must first understand the difference between the two:
Parameter
Personal Loan
Loan Against Securities
Collateral Requirement
Personal Loans are unsecured loans you can borrow without any collateral, guarantor, or security.
Loans against Securities are secured loans you can borrow against a security you own, such as a mutual fund, bond, share, etc.
Interest Rate
Since Personal Loans have no collateral for backup, lenders charge higher Personal Loan interest rates to cover the risk.
If you fail to repay the loan, the lender has your security to recoup their money. Therefore, they charge a lower Loan Against Securities interest rate due to the lower risk involved.
Loan Amount
Lenders have a maximum limit to the loan amount they can lend without security.
The loan amount depends on the asset’s value.
Repayment Tenure
The repayment tenure is shorter, ranging from 12 to 60 months.
The repayment tenure is longer, up to 15 years.
Documentation
The application is 100% online with minimal documentation involved.
The application process requires extensive documentation related to the securities being offered.
Interest on Personal Loans Vs Loan Against Securities
Here is a comparison of interest rates offered by different banks and NBFCs for both loan types:
Lender’s Name
Personal Loan Interest Rates
Loan Against Securities Interest Rates
Hero FinCorp
15% p.a. onwards
11% p.a. onwards
HDFC Bank
10.5% p.a. - 21.00% p.a.
9.90% p.a.
Yes Bank
10.99% p.a. onwards
9.00% p.a. onwards
HSBC Bank
9.99% p.a. - 16.00% p.a.
8.55% - 12.75%
Axis Bank
10.49% p.a.- 22% p.a.
9.00% p.a. onwards
Kotak Mahindra Bank
10.99% and above
9.25% - 13% p.a.
ICICI Bank
10.75% p.a. - 19.00% p.a.
16.80% onwards
Bank of Baroda
10.90% p.a. - 18.25% p.a.
9.20% to 9.45%
State Bank of India
11% p.a. - 14% p.a.
8.55% - 11.05%
Federal Bank
11.49% p.a. onwards
12.50% p.a. onwards
Punjab National Bank
11.40% p.a. onwards
10.40% p.a. onwards
Advantages of Loan Against Securities and Personal Loan
While deciding between a Personal Loan and a Loan Against Securities, you must understand that both funding options have advantages that the other lacks. Here’s a look at the pros of both types of loans:
Advantages of Personal Loans:
You can use a Personal Loan for almost any purpose without any usage restrictions.
Due to high competition in the market, you will find a loan plan with reasonable interest rates.
The borrowing limits are higher according to the lender’s policy.
These are collateral-free loans that do not pledge any security, asset or guarantor.
Regular Personal Loan repayment helps build a credit history.
With minimal formalities involved, these loans are faster and easier to access.
The repayment schedule is easily manageable, with flexible loan terms of up to 60 months.
Advantages of Loans Against Securities
The Loan Against Securities interest rate is lower due to the lower risk involved for the lender.
A Loan Against Securities can have two repayment options: demand or overdraft.
The returns and dividends continue accruing even during the loan term.
Easy processing due to no income proof and other documents involved.
Disadvantages of Loan Against Securities and Personal Loan
While both loan types have advantages, they have some disadvantages as well. Let’s take a look at them:
Disadvantages of Personal Loans:
The Personal Loan interest rates, processing fees, and other charges are higher due to more risk for the lender.
Irregular repayment habits may increase your debt over time.
Since the repayment terms are shorter, the EMIs may become unmanageable even if you choose the longest possible tenure.
Missing even a single EMI will have consequences on your credit score.
Disadvantages of Loans Against Securities:
The loan amount is limited according to the value of the pledged securities.
You cannot sell the securities if they become profitable during the loan term.
Lenders have a limited list of securities they accept as collateral against a loan.
Enter a few necessary details like your name, contact details, employment information, loan requirements, etc.
Scan and upload your identity, income, residence proofs, and other essential documents.
Wait for verification and approval.
Accept the loan offer to initiate the disbursal process.
Conclusion
Both Personal Loans and Loans Against Securities are lucrative funding options with unique pros and cons. Your final choice depends on your loan requirements, risk appetite and repayment capacity. Whether you borrow a Personal Loan or a Loan Against Securities, ensure you repay it on time to save your credit score and become debt-free.
Frequently Asked Questions
1. What is a loan taken against security called?
A loan taken against a security is called a Loan Against Securities.
2. Why do people take loans against securities?
People take Loans Against Securities to cover their urgent or planned expenses, like medical emergencies, home renovation, weddings, debt consolidation, big-ticket purchases, foreign vacations, study abroad programmes, etc.
3. Can I take a personal loan and invest in stocks?
Personal Loans have no usage restrictions. So, you can take a Personal Loan and invest in stocks. However, it is not advisable as the market is volatile and may result in loss if the stock market goes down. You must take this step only if you are sure of repayment, even under tough market conditions.
4. What are the advantages of Loans against securities?
Low-interest rates, flexible repayment, accruing returns, and minimal documentation are the most notable advantages of Loans Against Securities.
Disclaimer: The interest rates presented in this blog are for informational purposes only. The actual interest rates and terms offered by banks and financial institutions may vary and are subject to change. Before making any financial decisions or commitments, we strongly recommend consulting with the respective banks or financial institutions to get the most up-to-date and accurate information. The blog content provides general information and should not be considered as financial advice. Any financial decisions you make should be based on a thorough understanding of your individual financial situation and careful consideration of the options available to you. Always conduct your research and seek professional advice if necessary.
Katyaini is a finance expert with a focus on the non-banking financial sector, bringing over 8 years of experience in NBFC. She specializes in simplifying complex financial concepts for readers, helping them navigate the NBFC landscape. Outside of work, she is passionate about travelling.
