A loan against securities allows investors to unlock liquidity without selling their market-linked assets. By pledging shares, mutual funds, bonds, ETFs, or other approved instruments, borrowers gain access to funds while continuing to benefit from market participation. However, understanding how interest is calculated and how EMI structures work is essential to estimating the true cost of borrowing. Knowing how a loan against securities rate of interest is applied enables borrowers to plan repayments more accurately and choose a structure that aligns with their cash flow. This guide explains how to calculate interest, how EMI formulas work, and what factors influence overall borrowing costs.

Understanding how a loan against securities works

A loan against securities functions as a secured loan where the borrower pledges eligible financial instruments as collateral. The lender assigns a loan-to-value ratio based on the asset category and approves a loan accordingly. Borrowers can choose between an overdraft-style limit or a term loan with fixed EMIs. The interest rate depends on asset stability, borrower profile, and lender policies. Because the loan is fully secured, interest rates are generally more competitive than unsecured loans. Before calculating interest, borrowers must understand the loan structure—whether interest is charged only on the utilised amount or on a fixed principal amount under EMI plans.

How lenders determine interest rates

The loan against securities rate of interest varies depending on the type of security pledged. Shares, which are more volatile, often attract higher rates compared to debt instruments such as bonds or liquid mutual funds. Lenders evaluate:

• Volatility and liquidity of the pledged asset
• Borrower’s credit score and repayment history
• Loan tenure and repayment structure
• Overall market interest rates
  Borrowers pledging stable and low-risk securities usually qualify for more favourable pricing. Understanding these factors helps in anticipating the interest calculation and EMI amount.
  

Simple interest vs reducing balance interest

The method of calculating interest depends on whether the loan operates as an overdraft facility or an EMI-based term loan.

• Simple interest applies primarily in overdraft-style loans, where interest is charged only on the utilised amount.
• Reducing balance interest applies in EMI-based loans, where interest is calculated monthly on the outstanding principal.
  Borrowers should identify the method used before performing calculations, as the interest structure significantly affects the total cost of borrowing.

How to calculate interest under simple interest

For simple interest, the formula is:
Interest = Principal × Rate × Tenure
For example, if you borrow one hundred thousand rupees at an annual rate of nine per cent for one year, the interest is:
100000 × 0.09 × 1 = 9000 rupees.
This method is straightforward and commonly used when the borrower withdraws funds only as needed from an overdraft limit. It helps borrowers estimate interest outflow quickly without complex formulas.

Calculating EMI under reducing balance method

For term loans with fixed EMIs, lenders use the standard amortisation formula:
EMI = [P × R × (1+R)^N] ÷ [(1+R)^N − 1]
Where:

• P = loan amount
• R = monthly interest rate (annual rate ÷ 12)
• N = number of months in the loan tenure
  For example, borrowing one hundred thousand rupees for twelve months at nine per cent results in a monthly interest rate of 0.09 ÷ 12. Using the formula gives an EMI of approximately eight thousand seven hundred and fifty rupees. Borrowers can check different tenure options to understand how the EMI adjusts with time.

Understanding components of EMI

Each EMI consists of two parts:

• Interest component, which is higher during initial months
• Principal component, which increases gradually as the outstanding balance reduces
  The EMI remains constant, but the distribution shifts monthly. Borrowers planning prepayments should understand this breakdown because prepaying early leads to greater savings by reducing interest-heavy instalments.

Factors that influence EMI calculations

Multiple elements affect the final EMI amount and interest outflow, including:

• Loan amount – Higher borrowing increases EMI and total interest
• Tenure – Longer tenures reduce EMI but increase total interest
• Interest rate – Even a small rate change significantly impacts EMI
• Type of security – Stable instruments support better pricing
  Borrowers should choose a tenure that balances affordability with long-term cost efficiency.

Impact of prepayments on interest

Prepaying a loan against securities can reduce both EMI pressure and total interest. Many lenders allow partial payments or full foreclosure with minimal penalties. When the outstanding principal reduces, future interest also decreases. For overdraft-style loans, repaying early immediately lowers the amount on which interest is charged, offering cost-effective flexibility.

Using calculators for accurate projections

While manual calculations help understand the process, online EMI calculators offer precise results instantly. Borrowers can input different loan amounts, rates, and tenures to compare outcomes. These tools simplify decision-making and help borrowers assess repayment capacity more effectively.

Choosing between overdraft and EMI-based structures

Borrowers must choose a structure that suits their financial behaviour:

• Overdraft-style limit works well if funds are required intermittently, as interest applies only to the utilised portion.
• EMI-based term loans suit borrowers who prefer predictable monthly instalments.
  Understanding how interest applies in each structure ensures borrowers select the most cost-efficient option.

Ensuring accurate documentation for smooth processing

Although documentation does not directly influence calculations, any delays in verification can postpone disbursal. Borrowers should prepare:

• KYC documents
• Demat or mutual fund statements
• Proof of income, if required
• Pledge forms applicable to specific securities
  Efficient documentation helps avoid delays and ensures timely calculation of interest and EMI.
  

Final thoughts

Calculating your loan against securities rate of interest and EMI is essential for making sound borrowing choices. By understanding whether interest is applied on a simple or reducing balance basis, learning how EMI formulas work, and evaluating factors that influence pricing, borrowers can plan more confidently. With the right repayment structure and proactive financial management, a loan against securities can offer liquidity while keeping long-term investment goals intact.