Loan against securities has been gaining popularity with Indian investors who wish to borrow at short notice without having to give up their investment portfolio. It enables the borrower to mortgage his/her marketable securities like shares, mutual funds, bonds, or government securities to access loans at comparatively low interest rates than for unsecured personal loans. It is important to know what determines loan against securities interest rates in order to make an informed decision and receive the best possible deal that most suits your needs.

In this step-by-step guide, we will detail the major determinants of the loan against securities rate of interest and how to negotiate better terms. What you learn will benefit retail customers as much as high-net-worth customers in India in getting better yield on this product.

What is loan against securities and why does it matter

A securities loan is a collateral loan where marketable securities are used as collateral and pledged by the borrower. The lender looks at the market value and liquidity of the securities before lending, typically lending between 50-90% of the market value.

It is a popular form of loan because:

• Interest charges are less compared to unsecured loans as collateralisation reduces risks.
  

• Processing is quicker as the lender's risk is reduced.
  

• Investors can keep their investment and receive dividends or capital gains.
  

• The loan term can be negotiated, typically several months to over a year.
  

As the interest would directly affect the cost of borrowing in general, it must be understood what determines the loan against securities interest rates.

Determinants of loan against securities interest rates

1. Quality of pledged securities

The nature and quality of securities to be pledged are the chief determinants of the interest rate. Borrowers find highly liquid and stable securities like government securities, blue-chip shares, and large-cap unit funds most desirable.

• Low-quality securities command higher interest rates.
  

• Risky or volatile securities command higher margins and interest rates.
  

• That which has been exchanged on National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) tends to qualify better.
  

When you are gifting shares of strong companies with favorable backgrounds, you can negotiate lower fees than stock that is less reputable.

2. Loan-to-value (LTV) ratio

LTV ratio is a percentage of the value of the loan against the market value of the collateral securities. You borrow Rs. 10 lakh worth of securities and get Rs. 7 lakh approved by your lender, your LTV is 70%.

• It is more secure for lenders to have low LTV and they can lend you at lower interest rates.
  

• It is riskier for lenders to have high LTV and charges more.
  

• Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) policies give limits to acceptable LTVs.
  

It will keep your loan against securities interest rates in check if you are cautious with your selected LTV.

3. Borrower's repayment history and credit history

Lenders decide your credibility for borrowing against securities. Good repayment record and good credit score build credibility, and competitive interest rates are given by lenders.

• Borrowers with CIBIL scores of 750 and above are given lower interest rates.
  

• Defaulters as well as bad credit history borrowers are charged a higher rate of interest or are even rejected.
  

• Lenders can even decide your stability in income levels and employment.
  

Being good in credit discipline is essential to obtain the most favorable terms in securities-backed loans.

4. Loan term

Loan term will have some effect on interest rates since long duration exposes financiers to higher risks of security price fluctuation and default by borrowers.

• Short-term loans would typically bear lower interest rates.
  

• With higher tenure, higher interest rates would be charged to absorb the higher risk.
  

• Renewal or rollover may be extended but on fresh interest rates.
  

Selecting a best tenure that suits your repayment ability keeps the cost of borrowing low.

5. Market conditions and macroeconomic factors

Market and macroeconomic conditions significantly influence interest rates on all lending products, including loan against securities:

• With a decline in the repo rate or lending rates, interest rates typically decline.
  

• Economic instability or inflationary pressures can cause lending rates to rise.
  

• Demand-supply conditions of the credit market also influence the rates.
  

These macro factors' observers facilitate the borrowers to price their loans at the right moment.

6. Service charges and lender policies

Each financial institution, whether bank, non-banking finance company (NBFC), or fintech lender, has its own risk appetite and pricing.

• Introductory or teaser rates for specific securities or borrower categories are offered by some lenders.
  

• There are other fees like processing fee, pledge fee, and penalty interest that may impact the effective rate.
  

• If you have a relationship with the lender (the existing customers are likely to be offered lower interest rates) also makes a difference.
  

Bargaining with various lenders on websites or direct contact can enable you to get the best loan against securities interest rate.

Getting the best offer on loan against securities interest rates

Diversify your security portfolio

Check constituents of your securities and select high-quality collateral. Blue-chip stocks, government bonds, and AAA-grade debentures provide strength to your negotiation power.

Have good credit rating

Service loans and credit cards promptly, review your credit report from time to time, and settle dues. Good credit rating lowers perceived risk, thus cost of interest.

Opt for the best LTV ratio

Don't overborrow your LTV limit. Borrowing significantly lower than approved maximum LTV will ensure lower interest rates.

Compare financiers

Go to banks, NBFCs, and fintech companies. Compare interest rates, processing fees, and conditions using online comparison websites or personal financial planning facilities.

Negotiate on the basis of alternative offers if existing.

Choose a tenure based on your payment capacity

Pick the shortest tenure within your comfort zone to lower interest outgo. Refrain from tenure extension except for the unavoidable requirement to lower higher total interest payment.

Establish relationship with lender

Repeat clients who have an experience of successful transactions generally are offered more favorable terms and easier procedures.

Watch macroeconomic trends

Keep up with RBI policy changes and economic outlooks. Pre-plan your loan needs to take advantage of any rate cuts.

Serious issues when taking loan against securities

• Know the mechanism of margin calls: As soon as the market price of the collateral security falls below a maintenance margin, lenders call for more collateral or prepayment of the loan.
  

• Compare cost of borrowing: Compare not only interest rates but also all the fees such as processing fees, prepayment fees, and servicing fees.
  

• Check lock-in or foreclosure terms: There may be a prepayment fee with certain loans.
  

• Own record of security clearly so that it will not be misconstrued.
  

• Make your collateral securities earn income or dividends during the loan period.
  

Conclusion

Securities-backed loans are low-cost and flexible sources of finance in India's financial markets. Borrowers can realize optimal benefits once they are aware of factors influencing loan against securities rates of interest — varying from collateral quality to LTV ratios, credit, loan maturity, macroeconomic conditions, and lender's policy.

Sound borrowing, good credit practice, and wise comparison of terms of lenders provide entry to the best terms and interest rates. Being a good lender yourself, you would know these things that will enable you to utilize your securities to their maximum potential without losing track of your investment objectives. Being well-informed and proactive ensures you of the best rate with high cost of borrowing in the constantly changing Indian lending market.