Personal Loan vs Loan Against Securities: Which One Should You Choose?

When you need quick funds, two common options are a Personal Loan or a Loan Against Securities (LAS). Both offer liquidity, but differ in cost, risk, and eligibility. This guide compares the two to help you choose the one that best fits your financial needs and goals.

Both options provide liquidity, but they operate in very different ways. Choosing the right one depends on your financial situation, your financial goals, the urgency of your needs, the deciding factors, and your long-term goals, especially when considering a loan against securities vs a Personal Loan. This blog breaks down both options, compares them, and helps you decide which is best for you.

What is a Loan Against Securities?

 A Loan Against Securities is a secured loan where you pledge financial assets like shares, mutual funds, bonds, or life insurance policies as collateral. You receive funds based on a percentage of their market value, without selling them. Your investments continue to earn returns while providing liquidity. To qualify, you must hold sufficient eligible securities to cover the loan amount.

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What is a Personal Loan?

A Personal Loan is an unsecured loan that doesn’t require collateral. Approval is based on factors like credit score and income. You can use the funds for any purpose - travel, education, purchases, or emergencies, with flexible repayment options.

Key Differences: Personal Loan Vs Loan Against Securities

Here are the key differences between Personal Loan and loan against securities:

Feature	Personal Loan	Loan Against Securities (LAS)
Nature of Loan	Unsecured	Secured
Interest Rate	Between 9.99%–25% p.a.	Between 9%–11% p.a.
Loan Amount	Based on income and credit score	Based on the market value of pledged securities
Collateral Required	No	Yes (shares, mutual funds, bonds, etc.)
Disbursal Speed	Fast (within 24–48 hours)	Moderate (depends on asset verification)
Risk to Borrower	No asset risk, but higher EMI burden	Risk of asset liquidation, if market value drops
Usage Flexibility	Can be used for any purpose	Generally used for business, education, or large expenses
Ownership of Assets	Not applicable	Retained (you still earn dividends/returns)
Best For	Quick cash without assets	Cost-effective borrowing with investments as collateral

Pros and Cons of Taking a Loan Against Securities

Pros of Getting a Loan Against Securities

• Quick Access to Funds: The application and disbursement process for LAS is often very fast, with some lenders providing quick access to funds. This makes it an ideal option for addressing urgent financial needs, such as a medical emergency or a business opportunity.
• Lower Interest Rates: Because the loan is secured by valuable collateral, lenders face less risk, allowing them to offer less interest rates compared to unsecured loan options.
• Retain Ownership of Assets: You can access liquidity without having to sell your securities. You remain the owner of the pledged assets and continue to benefit from any dividends, interest payments, or potential capital appreciation.
• Flexible Repayment Options: Many LAS products are offered as an overdraft facility, meaning you only pay interest on the amount you use, not the full sanctioned loan amount. Repayment terms are often flexible, allowing for interest-only payments or pre-payments without penalties.
• Tax Benefits for Certain Uses: If you use the loan to invest in other assets or for business expenses, the interest paid may be tax-deductible. It is best to consult a financial advisor for specific tax guidance.

Cons of Getting a Loan Against Securities

• Market Risk and Margin Calls

Suppose the value of your pledged securities drops significantly. In that case, the lender may issue a margin call, requiring you to either pledge more securities or repay part of the loan to maintain the agreed loan-to-value (LTV) ratio.

• Risk of Asset Liquidation

Failing to meet a margin call or defaulting on the loan gives the lender the right to sell your pledged securities to recover the dues. This could lead to substantial losses, especially if the assets were appreciating.

• Loan Amount Limitations

The loan amount is capped based on the LTV ratio, usually ranging from 50% to 85% of your securities' value. If you require a higher loan amount, a Loan Against Securities (LAS) may not meet your funding needs.

• Restricted Ability to Sell Securities

While your securities are pledged, you cannot sell them to capitalise on market gains. To make a profit, you must first repay the loan.

• Interest Accumulation

In the case of overdraft facilities, interest continues to accrue over time. If you only pay the interest and not the principal, your total outstanding amount may increase.

• Limited Collateral Options

Only specific securities are accepted as collateral. Lenders typically approve liquid, high-quality stocks and funds from a predefined list, which may limit your choices.

When to Choose a Loan Against Securities

A loan against securities is best suited for:

• Short-term Financial Needs: It is an excellent way to cover emergencies or immediate cash flow gaps without disrupting your long-term investment strategy.
• Bridging Liquidity Needs: Use it to access capital quickly for things like a down payment or another investment, especially when you expect the value of your pledged assets to increase.
• High-interest Debt Consolidation: The lower interest rates of an LAS can be used to pay off more expensive unsecured debt, reducing your overall borrowing cost. 

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Advantages and Disadvantages of a Personal Loan

Advantages of a Personal Loan

Fast Access to Funds

This is crucial when you need to quickly borrow money in times of financial need. Many online lenders offer quick approval and disbursement, often within 24 to 48 hours, making personal loans a convenient solution during financial emergencies.

Flexible Usage

Personal loans, as a borrowing option, can be used for a wide range of purposes, including home improvement, medical expenses, weddings, and travel. This versatility sets them apart from more purpose-specific loans, making them a cost-effective borrowing option.

No Need for Collateral

Most personal loans are unsecured, so you don’t have to offer assets like your house or car as security. This lowers the risk of losing valuable property if repayment becomes difficult.

Predictable Payments

With fixed interest rates, your monthly instalments remain consistent throughout the loan term, making budgeting and financial planning easier.

Lower Interest Compared to Credit Cards

Personal loans typically offer lower interest rates than credit cards, making them a cost-effective option for consolidating high-interest credit card debt.

Opportunity to Boost Credit Score

Making timely and regular repayments on a Personal Loan can help build a strong credit history and positively impact your overall credit score.

Disadvantages of a Personal Loan

Possibility of Excessive Borrowing

The convenience and accessibility of personal loans may tempt some borrowers to take on more debt than they can manage, potentially resulting in financial strain.

Additional Charges

Lenders may impose various fees, including origination charges, foreclosure charges penalties for early repayment, and late payment fees. These extra costs can significantly increase the total expense of the loan. Therefore, be cautious and verify everything beforehand.

Impact on Credit Score

Missing payments can seriously harm your credit score, making it more difficult to obtain future loans at favourable terms. Additionally, the hard inquiry made during the application process may cause a slight, temporary dip in your score.

Inflexible Repayment Structure

Once the loan amount and term are finalised, you’re committed to a fixed monthly repayment schedule. Unlike credit cards, personal loans don’t allow you to carry a lower balance if your financial situation changes unexpectedly.

Not a Sustainable Financial Strategy

While personal loans can offer short-term relief, they are not a long-term fix for poor financial habits. Misuse can lead to ongoing debt and financial challenges.

When Should You Choose Each?

Go for a Personal Loan when:

• Don’t Own Enough Securities to Pledge
  Personal loans are unsecured, making them ideal when you lack investments or assets to offer as collateral.
• Need Money Immediately, like for a Medical Emergency
  With faster approval and disbursement, personal loans are ideal for addressing urgent financial needs.

Opt for a Loan Against Securities when:

• Have a Strong Investment Portfolio
  Leverage your shares, mutual funds, or bonds to access funds without liquidating your assets.
• Want to Minimise Borrowing Costs
  Loans against securities typically have lower interest rates compared to personal loans.
• You Don’t Want to Sell Your Investments But Need Liquidity
  This option lets you retain ownership and potential growth of your investments while meeting your financial needs.

Also Read -  5 Things To Know Before Applying For A Loan Against Property

To Conclude

Both personal loans and loans against securities provide valuable financial support, but they serve different purposes. Choose a Personal Loan for quick, collateral-free funds, ideal for urgent expenses but at higher interest rates. Opt for a Loan Against Securities if you have investments and prefer lower costs with continued returns, keeping in mind the risk of asset pledge. Your decision should align with your financial urgency, asset profile, and risk tolerance.

If you find yourself in need of a Personal Loan, you can apply for an unsecured Personal Loan from Poonawalla Fincorp. With a higher loan amount, instant applications, quick approvals, and flexible repayment tenure, Poonawalla Fincorp can be your financial partner during your financial journey. Apply today!

Frequently Asked Questions

What is the difference between a Personal Loan and a loan against securities?

A personal loan is unsecured and doesn’t require collateral, while a loan against securities (LAS) is secured by pledging financial assets, such as shares or mutual funds.

Can I use both a Personal Loan and a loan against securities together?

Yes, if your financial needs are large or diverse, you can use both options strategically based on urgency and cost.

Does a Personal Loan affect my credit score?

Yes, timely repayments can improve your credit score, while defaults can negatively impact it.

Are personal loans better than credit cards for debt consolidation?

Yes, personal loans typically have lower interest rates than credit cards, making them an ideal option for consolidating debt.

Which securities can be pledged for LAS?

Commonly accepted securities include shares, mutual funds, bonds, and life insurance policies with surrender value.

What happens if the value of my securities drops?

You may face a margin call, requiring you to pledge additional assets or repay a portion of the loan.