Personal loan vs. loan against securities: What’s better for urgent cash needs?

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Confronted with an unexpected money crunch, many resort to borrowing cash in a hurry. Two popular solutions are personal loans and loans against securities (LAS). Both can cover short-term cash needs but differ vastly in price, risk, and ease of access. Here's how to choose the best one for you.

Personal loans are fast but expensive

Personal loans are not secured, so you do not need to provide any collateral. That makes them one of the fastest ways of getting funds—within 24 to 48 hours if you have a good record of repaying debts. But there is a price for this speed. Personal loans will usually charge an annual interest rate of between 10% and 24%, depending on your credit rating and lender policy.

Since there is no collateral, banks run higher risk—and that is transferred to the borrower in the form of higher EMIs. Also, prepayment charges may be levied if you repay the loan early.

LAS can prove to be cheaper, but entails market-related risk

A loan against securities allows you to borrow money by immobilizing your shares, mutual funds, bonds, or other market-linked assets. Being a secured loan, the rate of interest is normally lower—about 8% to 12%, depending on the value and nature of the securities.

The largest advantage of LAS is that you retain ownership of your investments but at the same time enjoy liquidity. But with a condition: When your securities' value falls below a certain point, the lender may demand additional collateral or sell the securities to recover dues. This makes LAS riskier during market volatility.

Consider your ability to repay and asset value

Choose a personal loan if you need urgent cash and don't have significant investments that can be mortgaged. It's ideal for short-term needs, like medical bills or vacations, when disbursal speed is more critical than cost.

Instead, use LAS when you have a stable portfolio and you don't want to lose your long-term investment. It is a smart move when you are certain the market will never go down sharply and you would rather the cost of interest be lower.

Match the loan to your financial profile

Both LAS and personal loans are for instant cash needs, but the choice is based on your asset base, market sentiment, and urgency level. Compare the costs, risks, and repayment duration well ahead of the choice. A wrong loan can invite more stress than comfort.