The choice between a personal loan and a loan against securities depends on your financial situation and  funding needs. Each type of loan has its own advantages and disadvantages, and the choice should be made based on careful consideration of your requirements.

A loan against securities is a financial product where individuals can use their existing financial assets such as stocks, mutual funds or other securities as collateral to secure a loan from a financial institution or lender. This type of loan allows borrowers to access funds without having to sell their investments. On the other hand, a personal loan is an unsecured loan, making it accessible to a broader range of borrowers. Here are some factors to consider when choosing between the two:

Loan against securities

Investment collateral: It requires you to pledge your investments such as stocks or mutual funds as collateral. If you default on the loan, the lender can sell your securities to recover the amount.

Interest rates: These loans typically offer lower interest rates compared to personal loans because they are secured by collateral. The interest rates can vary between 9% and 14%, depending on the lender. If you have valuable securities and can comfortably pledge them without risking your financial stability, a loan against securities may offer lower rates.

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Loan amount: The loan amount is usually determined by the value of the securities you pledge as collateral. It can be a percentage of the total value of the securities, ranging from 50% to 70%. It could be higher in certain cases, depending on the borrower and the lender.

Tenure: Loan against securities often comes with shorter loan tenures compared to personal loans. The repayment tenure offered is between 1 year and 3 years. This may, however, vary depending on your lender and the loan terms.

Processing time: The processing time for such loans is quicker since the lender already holds the collateral. If you need quick access to funds, a loan against securities might be more suitable due to its shorter processing time.

Risk of investment: There is a risk of losing your investments if you cannot repay the loan. If the value of your securities drops significantly, you may need to pledge additional securities or repay a part of the loan.

Adhil Shetty, CEO, Bankbazaar.com, says, “You must carefully choose your option depending on your repayment strategies and fund requirement. If you are unable to repay the loan against securities during the loan tenure, the lenders have the right to liquidate your holdings and recover the amount.”

Personal loan

Collateral-free: Personal loans do not require any collateral. They are unsecured loans, making them accessible to individuals who may not have valuable assets to pledge. If you have a good credit score and a stable income, you may qualify for a personal loan with competitive terms.

Interest rates: Personal loan interest rates tend to be higher compared to loan against securities because they involve higher risk for the lender. The interest rate may vary from 11% to 15%. It may be lower or higher depending on the bank and your credit score.

Shetty explains, “Personal loans can be a useful financial tool when used responsibly, but borrowers should carefully consider their ability to repay and compare offers from different lenders to secure the best terms and interest rates for their needs.”

Loan amount: The loan amount for a personal loan is based on your creditworthiness, income, and other financial factors. It may be lower than what you can get with a loan against securities.

Tenure: Personal loans often offer flexible tenures, allowing you to choose a repayment period that suits your financial situation. It may range between 12 months and 60 months.

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Processing time: The approval process for personal loans may take longer, as the lender needs to assess your creditworthiness and financial history. However, if your credit history is clean and you pay your debts on time, you can also get pre-approved offers for personal loans.

Risk: Personal loans do not put your assets at risk, but defaulting on them can negatively impact your credit score and future borrowing capacity. It is recommended to assess all pros and cons before applying for personal loans. Also, higher interest rates may put you at risk of default. Therefore, one must keep a repayment plan ready even before applying for the loans.

Raoul Kapoor, co-CEO, Andromeda Sales and Distribution, says, “The choice between a loan against securities and a personal loan depends on individual financial circumstances. Loan against securities is secured by existing investments like stocks or bonds, offering lower interest rates and higher loan amounts, depending on the value of assets. In contrast, personal loans are unsecured, accessible without collateral and are available at comparatively higher interest rates of, say, 1.5% to 2% above the interest rate applicable in case of loan against property.”

Borrowers with substantial securities can opt for loan against securities for cost-effectiveness, while those without assets might choose personal loans for accessibility. Ultimately, the decision should align with one’s financial goals, risk tolerance, and collateral availability.

FINDING FUNDS

  • Choice between a loan against securities and a personal loan depends on your repayment strategies.
  • If the value of your securities drops, you may need to pledge additional securities or repay a part of the loan.
  • Approval process for personal loans is longer as the lender has to assess your creditworthiness.