girl thinking personal loan or loan against securities

Personal Loan or Loan Against Securities?

When an unforeseen financial emergency looms over you, loans from banks, NBFCs, or other financial institutions may come to the rescue. Loans come in many types, but not all are the same. Nor do they have the same benefits, meaning that a loan that fits others’ needs does not necessarily give the same benefits to you. So, taking a loan requires considering the loan size, tenure, interest rates, repayment options, eligibility, and many other factors. Compare them all and choose one that works best for you based on your fund requirements.

If you have a loan in mind shortly but are baffled about choosing between a personal loan and a loan against securities, this handy guide is for you. Having read this, you will be able to make informed decisions. Here, we will differentiate both loan types with their advantages and disadvantages included.

What is a personal loan?

A personal loan is an unsecured loan, which does not require you to provide collateral, as is the case with a loan against securities. Banks and NBFCs offer this loan based on the borrower’s employment history, income level, occupation, credit score, and repayment capacity. You may take it to meet your various requirements, including weddings, consolidating the existing debt, travelling, medical emergencies, home renovation, etc.

Key factors of a personal loan

  • Income proofs, such as salary slips and income tax returns, are needed to apply for this loan.
  • This unsecured loan may include other charges, such as processing fees, insurance charges, and service fees.
  • If you choose to pre-close the loan, the foreclosure charges are applicable.
  • Interest rates of a personal loan are higher than that of a loan against securities.

What is a loan against securities?

Such loans are loans against fixed deposits, shares, insurance policies, mutual funds, and other financial securities. While taking a loan against securities, the borrower pledges his investments as collateral to a bank against the loan amount he wants to raise.

The loan size and interest rates depend on your credit score and the type of security you pledge as collateral. Also, remember that not all stocks and securities get you a loan. It is available against the approved securities, a few of which are listed below:

Loan against shares

You may deposit your Demat shares as security against the loan. While it keeps you invested in equities, you may raise funds during financial emergencies at the same time. As the stock market is volatile, your loan amount may fluctuate. Usually, you get up to 50% of the value of the share pledged. However, if you take a loan against shares from Abhiloans, you may enjoy a higher loan size.

Loan against Mutual funds

The value of the MF units you hold determines the loan amount. It typically goes up to 50% of the market value and 70% of the net asset value of the MFs pledged. Many financial institutions, including Abhiloans, also offer a loan size of up to 75% of your MF unit value.

Loan against insurance

Banks, NBFCs, and insurance companies offer loans against insurance policies. But, it is not available against Unit Linked Insurance Plans or term insurance policies. The loan amount may range from 60 to 90% of the surrender value of the insurance policy. You may apply for a loan against insurance at least three years after the purchase of the policy.

Why choose a loan against securities over a personal loan?

  • A loan against securities is cheaper than a personal loan.
  • Since your investment remains yours, you continue to benefit from it.
  • A loan against securities is a better option to meet your short-term fund requirements.
  • It works as overdraft facilities where you pay the interest only on the amount you withdraw for the period you use it.

The deciding factor

The sum and substance conclude that a loan against securities is a better option if you:

  • Need fund requirements for a shorter period
  • Want your equity investments to come to your rescue during financial emergencies
  • Do not want to pay foreclosure charges, and other charges
  • Are looking for a more flexible loan option