Personal Loan or Loan Against Securities – Which Is A Better Option?

It is not uncommon nowadays for anyone to find themselves in the middle of a financial crunch – sudden medical expenses, house renovations, relocation, children’s education; the pressures are enormous. At such times, one is often in a quandary regarding where the money can be raised from.

If you are facing such a situation, one of the options in front of you is to get a personal loan – a loan you can get without having to put up any collateral. Another option, if you have securities in your name, is to get a loan against those securities, whether shares, bonds, mutual funds or life insurance policies. Both of these loan options are now available online, making them both rather easy solutions to a financial emergency. Thus, the crux of the matter then becomes “How does one decide whether to opt for a personal loan or a loan against a security?”

This blog is meant to help you decide for yourself whether a personal loan is a better option for you as compared to a loan against security.

Both personal loans and loans against securities have a common advantage is that you can use the loan raised for any purpose – there are no strings attached in this regard. Thus, in order to decide which one works for you, you need to assess the terms and conditions attached to each loan.

One of the primary considerations in deciding whether to take a personal loan or a loan against securities is the interest rate offered. In general, the loan against securities interest rate is lower than the personal loan interest rate. Interest rates also vary from lender to lender. Be aware also of the loan to value ratio. The loan offered will be 50% to 70% of the market value of the shares or securities. Each lender will have a list of eligible securities against which they offer loans. Not every security is considered loan worthy.

Thus, if the securities you hold give you the loan amount you need, you may find it prudent to opt for a loan against security. While taking a decision, keep in mind that the value of the shares in the market can fluctuate – sometimes rather wildly. If the value of the pledged securities falls significantly, the lender may ask you to pledge further securities or repay a portion of the loan. In the case of a personal loan, the EMIs are usually fixed at the time of loan approval.

A loan against securities is usually offered to the lender as an overdraft facility. This feature is especially useful if you are not sure of the exact loan amount you require. Thus if you negotiate a loan of ₹500,000/- but only use ₹100,000/- in the first month, the interest will only be charged on the amount used.

Perhaps the most important consideration while deciding on the type of loan is your repayment ability. Overestimating the figure may result in having to forfeit securities pledged if you opt for a loan against security. Once you have arrived at a figure, use an online personal loan calculator to compare the manner in which interest rates offered and the loan tenure affect the EMI of both products. Compare the offering of various lenders and the other terms and conditions as well.

It is best to arrive at a decision after doing a detailed comparison between each lender’s offering as well as a comparison between the terms and conditions offered against personal loans vis-à-vis loans against securities.