What is Loan Against Shares – Its Types and How to Get It ?
11 November 2022
Loans are useful credit options that allow us access to cash by pledging collateral during a financial emergency. In Loan Against Shares, you can get a loan by pledging your shares or securities. The bank or NBFC offers you money against your investments for the long term while your shares reap the benefit of compounding.
This article tells you how a loan against shares works, its eligibility criteria, the documents required and how to get a loan against shares. Read on!
What is Loan Against Shares?
All securities, like bonds, mutual funds, shares, etc., can be pledged to financial institutions to get loans for a fixed period. If you urgently require monetary help, taking a loan against your equity shares is a useful option.
This loan option is similar to the concept of a mortgage, where you take a loan against an asset, like a house, property, etc., for a fixed period and repay the loan along with interest. Shares and other securities are considered valuable assets that can generate considerable capital appreciation; hence, it is possible to get aloan against Demat shares and other market securities.
How Does Loan Against Shares Work?
All banks and financial institutions update a list of shares and bonds they accept as a pledge against a loan. Most banks accept shares and corporate bonds of around 50-100 top companies in the market as suitable collateral options against loans.
When you apply for a loan, you pledge several shares from your portfolio to the financial corporation against which the corporation provides you with an amount for a certain period of months at a rate of interest.
The securities, although pledged to a bank, are still your property; thus, you enjoy its gains and benefits. The pledge is dissolved when you repay an agreed-upon amount between you and the bank. The bank also earns interest from the borrower, as applicable on all loans.
Loans against shares are a useful credit instrument for someone seeking immediate financial aid. Some of the best features of this instrument are as follows:
9-18% is the usual loan against shares interest ratein India
12-36 months is the maximum tenure for a loan against shares
Private firms, partnership firms, Indian citizens, Non-resident Indians (NRIs), Hindu Undivided Families (HUFs), public limited companies, and sole proprietors are all eligible for this kind of loan
Generally, the loan value is 50-60% of the equity amount, but it can go up to 80%. If the collateral securities perform consistently negative, your preferred bank or NBFC may ask for additional securities to balance the collateral
Like other loans, an initial processing fee is charged for this loan. This initial fee includes annual maintenance charges, stamp duty, etc.
You can pre-close a loan without any prepayment charges
You do not need any guarantor for a loan against shares, as your collateral shares are pledged with the lender
Why Take a Loan Against Shares?
You can easily borrow a certain amount without selling your assets if you have a stable and potential portfolio with credible shares and other Demat assets. It is a convenient credit option for regular investors who deal with shares and the stock market on a regular basis.
Furthermore, it is better to pledge equity shares than offering any other type of collateral, as you can still benefit from the power of compounding and pay off your loan while your shares undergo capital appreciation.
What is the Eligibility for Loan Against Shares?
Here are the eligibility criteria for applying for a loan against shares:
Must be a citizen of India, NRI or any business organisation
The entity must have a Demat account with any depository participant
Applicant should be between the ages of 18-65 years of age
Must provide proof of stable income
What are the Documents Required for Loan Against Shares?
Similar to all official processes, several documents are required to successfully apply for a loan against Demat shares:
First, research the details and benefits of various loan agreements. Once you decide upon a financial institution that’s offering you the best loan amount against your purchased shares, you can go ahead with the loan application
Check your eligibility for the loan against shares and prepare the documents accordingly
Log in to the online portal of the financial institution to get the online form or visit their nearest branch if you wish to apply via an offline process
Provide all your basic information, like name, phone number, PAN, etc.
Assess your total portfolio value and select the types of Demat securities that you wish to pledge
Submit the application form along with the required documents via online or offline mode
You will receive a confirmation email from both the bank and the depository participant upon successful application
What are the Types of Collaterals for Loan Against Shares?
All Demat securities listed below are acceptable as collateral for loans against equity shares.
Demat shares and physical shares
National Savings Certificate
Gold deposit Certificates
National Bank for Agriculture & Rural Development (NABARD) UTI Bonds
Kisan Vikas Patra
What are the Advantages of Taking a Loan Against Shares?
Keeping shares as collateral against loans has several benefits for both the borrower and lender, some of which have been listed below:
The value of the shares can be easily assessed
The securities can be easily traded if the borrower fails to close the loan
No charges for prepayments
The shareholder can enjoy the benefits of compounding on his/her assets even when they are pledged
Interest is payable on the used amount only
Comparatively moderate interest rates
What are the Disadvantages of Taking a Loan Against Shares?
Here are some disadvantages of taking a loan against securities:
Financial institutions offer loans against limited types of securities.
The amount of loan granted can be much lower than the value of the collateral.
The borrower is restricted from selling the pledged stocks until the loan is closed.
What to Avoid while Availing a Loan Against Demat Shares?
It is crucial to understand that loans, like all other credit options, are liabilities and not assets. Therefore, failing to pay back the amount may result in a heavy financial loss on the borrower’s end.
The most important thing to remember is that the borrowed capital should be used for definite factors with an assured return on your investment. Any risky venture should be avoided as it might result in a loss of your collateral securities.
Also, you must have a thorough understanding of the stock market and the companies whose shares you will pledge for the loan. This will ensure you are able to pay back the loan along with the interest rate on time.
Loan against shares is a useful credit option for market investors who require immediate financial aid and have a standard portfolio. In addition, it is convenient to keep securities as collateral against a loan. This option is mostly beneficial but also has certain disadvantages as a liability. Hence, thoroughly understanding all aspects of this credit instrument before investing is important.
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Q1. Can I take a loan against my mutual funds?
Ans: Yes, just like you can take a loan against shares and other assets like gold, real estate, etc., you can get a loan from financial institutions by keeping your mutual fund holdings as collateral.
Q2. How to release the securities after payment of the loan?
Ans: Once the loan is repaid, the securities can be released by filling in a release request form. Again, the procedure may vary from one financial institution to another.
Q3. Can the loan against shares be paid in parts?
Ans: Yes, the loan can be paid in parts and early, but it must be within the total tenure. There are no charges applicable for part payments or early payments.
Q4. What are the minimum and maximum amounts for a loan against securities?
Ans: There are no set amounts, and it completely depends on the bank or NBFC providing the loan. Based on the institution’s requirements and allowance, the limit is set.
Q5. Is it safe to keep securities as collateral?
Ans: It is completely safe and productive to keep securities as collateral. However, the financial institution is responsible for the safety of your assets. However, loans are liabilities. Make sure to have a repayment plan in case your shares perform poorly in the stock markets.
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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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