How Do You Decide Between A Personal Loan And Debt Sought Against Securities?

Today, finding yourself in a financial crisis is not unusual. Whether Medical emergencies or pink slips, sudden transfers and relocations, sky-rocketing charges of higher education – the list is endless. Even if there is no crisis, there are often situations where you wished you had more cash than was available in your savings account – a house renovation, a wedding, or a holiday offer that you simply cannot refuse.

Thankfully today, there are several loan products that you can avail of during such times of need. In this blog we discuss two loan products – the personal loan and the loan against securities. To begin with let us look at the basic features of each product.

A personal loan is an unsecured loan offered to individuals by banks and NBFCs. Loan amounts vary from lender to lender. You can avail a personal loan for an amount as low as INR 5000/- or as high as INR 50 Lakhs. The actual amount you can avail will depend on your repayment ability. The loan tenure ranges from three and a half to six years, depending on the lender. As with most loans the final loan amount will therefore depend on the money you can set aside for EMI payments each month, after keeping enough for your regular monthly expenses. Being an unsecured loan, interest rates offered are higher compared to secured loans like the debt sought against security or a home loan. A good credit score helps you secure the best personal loans with interest rates within 11%. However, interest rates on personal loan can be as high 44% as per market rates at the time of writing in July 2023.

A debt sought against securities or a loan against security, on the other hand is a secured loan with the security being offered as a collateral. The securities could include Non-Convertible Debentures, Insurance Policies, Mutual Funds, Shares, National Saving Certificate and such. Each lender will have a detailed list of securities against which loans can be offered. Interest rates are lower in comparison to the unsecured personal loan. The loan amount is dependent on the value of shares and securities deposited. This could be between 50% to 85% of the value of the securities deposited. Some lenders will also assess your income levels and credit scores to decide on the loan amount.

The crucial difference between a debt sought against securities and a personal loan is that the former is usually provided in the form of an overdraft facility. You are therefore charged interest only on the amount used and not the total overdraft limit, unlike a personal loan where you are charged interest on the entire loan amount. Additionally, you can continue to earn the dividend and bonus pay-outs of the securities deposited as a collateral. However, as the price of some securities like shares and mutual funds fluctuate, the loan value also fluctuates. Should the prices move in a downward direction, you will either be asked to deposit more securities or repay some of the amount taken. Penal charges are usually applicable on the amount withdrawn over the limit agreed on with the lender. In respect of the tenure of the debt sought against securities, this also varies from lender to lender. In the case of Tata Capital, it has a one-year tenure with an auto renewal facility. Other lenders offer a term based on the value of the loan amount and the interest rate charged. Loan amounts vary from INR 50,000/- to INR 1 crore. One of the most significant differences is that you do not need a good credit score to avail a loan against securities.

Thus, deciding on when and how to choose personal loans over loans against securities depends mainly on what works best for you. If the amount is relatively small and the need is really urgent, a personal loan may be a better option as the processing time can be under a day in the case of some lenders like IIFL Finance. Applications are online and paperwork is minimal. Of course, you require a good credit score to avail a personal loan and need to be above the age of 23.

Debt against Securities usually works better if the loan amount is bigger and if you have the time to do the required research. You will need to check if the securities that you have in your name will be honoured by the lender for a loan against them, and then put the required documentation together. Since interest rates are significantly lower, the age at which you can access the loan is eighteen years, and interest is charged only on the amount withdrawn, this often works far better if the loan amount is larger and if you do not require the loan in a single lump sum amount. This therefore works well especially if you are taking a loan for intensive repairs and renovations or if you are having a prolonged cash-flow issue in your business.

Finally, in order to decide on whether to take a loan against securities or a personal loan, it is best if you do an intensive comparison on what each lender is offering in terms of loan amount, interest rates, charges and penalties for each product. Compare this to your need and choose the one that will cost you the least in the long run.