5 Common Mistakes to Avoid When Applying for a Loan Against Securities

In an age where financial flexibility is crucial, a Loan Against Securities (LAS) offers a smart way to raise funds without liquidating your investments. Whether it’s shares, mutual funds, or Sovereign Gold Bonds (SGBs), pledging these securities as collateral can provide access to instant liquidity while still allowing your investments to grow.

A Loan Against Securities is ideal for meeting short-term financial needs—be it for business expansion, medical emergencies, travel, or even covering educational costs. However, many applicants unknowingly make mistakes that can lead to delays, rejections, or higher costs in the long run.

This article outlines the five most common mistakes people make while applying for a LAS and how you can avoid them to make the most of this convenient credit option.

1. Not Understanding the Eligible Securities

One of the most frequent mistakes people make is assuming all types of investments qualify for a Loan Against Securities. In reality, lenders have a predefined list of approved securities that are accepted as collateral. These may include:

• Listed equity shares
  

• Mutual fund units (both debt and equity)
  

• Bonds and debentures
  

• Exchange Traded Funds (ETFs)
  

• Sovereign Gold Bonds (SGBs)
  

When it comes to a Loan Against SGB, not all financial institutions offer the facility. It is essential to check if your bank or lending institution supports SGBs as acceptable collateral and under what terms.

Leading banks such as ICICI Bank provide a detailed list of eligible securities on their website. They also offer digital portals where you can check the acceptability of your holdings and get an indicative loan value.

Tip: Before applying, review your investment portfolio and consult with your lender to ensure your securities qualify. This step can save you from unnecessary rejections or the hassle of portfolio adjustments later.

2. Overestimating the Loan Value

Another common oversight is assuming that you can get the full market value of your investments as a loan. In practice, the lender provides a loan-to-value (LTV) ratio, which is usually a percentage of the security’s market value.

The LTV varies depending on the type and risk profile of the security. For instance, you may get up to 50% for equity investment and up to 70% - 80% for debt investments. The valuation is also affected by market volatility.

With a Loan Against SGB, the LTV may differ from a Loan Against Securities like shares or ETFs. That’s why it’s essential to understand the valuation policies and interest rate implications.

Tip: Use the loan eligibility calculators provided by banks to estimate your loan amount more accurately. Institutions like ICICI Bank offer online tools that help applicants check how much they can borrow based on the current market value of their pledged securities.

3. Ignoring the Fine Print on Margin Requirements

A critical component of LAS that many borrowers overlook is the margin maintenance requirement. Because the loan is backed by market-linked securities, the lender monitors the value of your portfolio daily. If market conditions cause your securities to drop below a certain threshold, you may be asked to:

• Pledge additional securities
  

• Repay part of the loan
  

• Or risk liquidation of pledged assets
  

This is especially important when dealing with equity shares or Loan Against SGB, where gold prices can fluctuate. Not adhering to margin calls may lead to the forced sale of your securities, possibly at a loss.

Tip: Keep an eye on market trends and monitor your pledged securities regularly. Opt for a lender that offers real-time alerts and a user-friendly dashboard to track margin levels and potential shortfalls.

4. Applying Without a Clear Repayment Plan

Since a Loan Against Securities is a type of overdraft facility, many borrowers treat it like a revolving credit line without planning their repayment. While interest is charged only on the amount used and for the duration it is used, this flexibility can sometimes lead to over-borrowing or extended usage.

If you use the loan for speculative purposes or to cover long-term needs without a repayment strategy, you could end up paying more in interest than you gain from holding your investments.

Tip: Treat the loan as a short-term funding option. Create a clear repayment timeline that aligns with your financial goals. You can even set up auto-debit options or partial repayments as per your cash flow to minimise interest burden.

5. Not Comparing Lenders and Terms

Finally, many applicants go with the first bank or lender they know, without comparing offerings. However, interest rates, processing fees, minimum loan amounts, accepted securities, and service experience can vary significantly between institutions.

Some banks might also offer value-added features such as:

• Online application and instant disbursal
  

• Paperless documentation
  

• Real-time portfolio tracking
  

• Competitive interest rates and flexible tenure
  

Banks with strong digital ecosystems, such as ICICI Bank, often offer Loans Against Securities (LAS) through a fully online platform for select customers. Eligible customers can apply, pledge securities, monitor their portfolio, and repay—without the need to visit a branch.

Tip: Don’t just look at the interest rate. Consider the overall service experience, digital tools, customer support, and flexibility offered by the bank. A small fee difference might be worth paying if it ensures better portfolio management and lower risk.

Conclusion

A Loan Against Securities is a prudent option for those who want liquidity without breaking their investments. However, success lies in making informed decisions and avoiding common pitfalls like underestimating risk, misunderstanding eligibility, or neglecting repayment plans.

Whether it’s a traditional equity portfolio or a Loan Against SGB, knowing your rights and responsibilities helps you make better financial decisions. Start by checking the list of acceptable securities, calculating your eligible loan value, and understanding the margin and interest policies.

Choose a reputed financial institution that offers transparent terms and reliable customer support. Leading banks with well-integrated digital platforms simplify the entire process—from application to disbursal to real-time monitoring—making LAS not just accessible but also efficient.

Taking the time to get it right can ensure that your loan not only serves your needs but also safeguards your long-term financial health.