Table of Contents
What is a Loan Against Shares?
A loan against shares is a secured financing option where you pledge your investment shares, mutual funds, debentures, or other marketable securities as collateral to obtain funds. This product is ideal for investors who need quick access to cash without having to sell their holdings, thereby preserving long-term growth potential and dividends.
- Collateral-Backed: Your shares serve as collateral.
- Retain Ownership: You continue to earn dividends and benefit from potential share price increases.
- Flexible Usage: Funds can be used for various personal or business needs.
- Lower Interest Rates: Compared to unsecured loans, the interest rates are typically more favorable due to the collateral provided.
How Does It Work?
When you apply for a loan against shares, the lender assesses the market value of your securities to determine your maximum eligible loan amount. Typically, the lender offers a percentage (usually between 50% to 70%) of the current market value of the pledged shares.
- Pledging Securities: Your shares from your Demat account are pledged as collateral.
- Valuation: The lender calculates the market value of your shares and determines the loan-to-value (LTV) ratio.
- Credit Limit: You receive a credit limit, often structured as an overdraft facility; interest is charged only on the amount you withdraw.
- Repayment: You repay the loan according to agreed terms. Your collateral remains with the lender until the full repayment is made.
Benefits and Risks
Benefits
- Immediate Liquidity: Access funds without selling your investments.
- Cost-Effective Financing: Lower interest rates because the loan is secured.
- Flexible Repayment: Options to repay either as an overdraft or through fixed installments.
- Preserve Investment Growth: Continue earning dividends and retain long-term growth potential.
Risks
- Market Volatility: A decline in share prices may lead to a margin call, requiring additional collateral or repayment.
- Over-Borrowing: Easy access to funds may result in borrowing more than is sustainable.
- Collateral Liquidation: In the event of default, the lender may liquidate your shares to recover the loan amount.
- Interest Rate Fluctuations: Variable interest rates can increase repayment costs over time.
Eligibility Criteria and Documentation
Eligibility Criteria
- You must be an individual investor holding eligible securities in a Demat account.
- Age typically between 18 and 65 (or 70) years.
- Stable income and good credit history are essential to ensure repayment capacity.
- Only shares listed on recognized stock exchanges and approved by the lender are eligible.
Required Documentation
- Identity Proof: PAN card, Aadhaar card, Passport, or Driver’s License.
- Address Proof: Utility bills, voter ID, or passport.
- Income Proof: Salary slips, bank statements (usually for the last 3-6 months), and Income Tax Returns (last two years).
- Securities Ownership Proof: Demat account statement showing the details of the pledged securities.
Step-by-Step Application Process
- Assess Your Portfolio: Evaluate the market value of your eligible shares and ensure they are on the approved list.
- Research Lenders: Compare banks and non-banking financial companies (NBFCs) for competitive interest rates and favorable terms.
- Gather Documentation: Prepare all required identity, address, income, and securities ownership proofs.
- Submit Application: Complete the application form online and upload the necessary documents.
- Collateral Evaluation: The lender verifies the pledged securities and calculates your eligible loan amount based on the LTV ratio.
- Receive Approval: Once approved, a sanction letter is issued with detailed terms including the available credit limit.
- Fund Disbursement: Funds are disbursed, typically to a current account, as per the approved structure (such as an overdraft facility).
- Repayment: Choose your repayment method—either periodic EMI or interest-only on the utilized amount—and maintain the required collateral value.
Comparison with Other Loan Types
Loan Against Shares vs. Unsecured Personal Loan
| Aspect | Loan Against Shares | Unsecured Personal Loan |
|---|---|---|
| Collateral | Requires pledging shares or securities | No collateral required |
| Interest Rate | Generally lower due to secured collateral | Tends to be higher due to increased risk |
| Processing Time | Faster approval due to clear collateral valuation | Longer approval process with extensive credit checks |
| Loan Amount | Determined by the market value of pledged securities | Based on creditworthiness, often lower limits |
| Investment Benefits | Retain dividends and capital appreciation | Not applicable |
Loan Against Shares vs. Loan Against Property
| Aspect | Loan Against Shares | Loan Against Property |
|---|---|---|
| Collateral | Investment portfolio (shares, mutual funds) | Real estate property |
| Disbursement Speed | Typically quick, as collateral valuation is straightforward | May involve more legal verification and longer processing times |
| Impact on Investments | Retains investment growth and dividend earnings | Property is tied up as collateral |
| Risk | Subject to market volatility of shares | Slower market fluctuations; typically lower risk in valuation |
Frequently Asked Questions (FAQs)
What is the maximum loan amount I can secure?
The maximum loan amount usually depends on the market value of your pledged securities, often offering up to 50-70% of that value. Specific limits can vary by lender.
Do I continue to receive dividends on my shares?
Yes. Even when your shares are pledged as collateral, you retain ownership and continue to receive dividends and benefits from corporate actions.
What happens if the value of my shares drops?
A significant drop in share value may trigger a margin call, requiring you to provide additional collateral or repay a portion of the loan to maintain the required loan-to-value ratio.
How long does the approval process take?
Approval is generally quick, often within a few days, as collateral valuation tends to be straightforward provided you submit complete documentation.
Can I prepay the loan without penalties?
Many lenders offer options that allow prepayment without penalties, though this can vary. Always check the specific terms before applying.
What types of securities are eligible as collateral?
Typically, you can pledge publicly traded shares, mutual fund units, bonds, and debentures. Lenders will specify which securities are acceptable.
How do interest rates compare to other loan types?
Loans against shares usually have lower interest rates compared to unsecured personal loans because they are secured by assets, reducing the lender’s risk.
Conclusion
A loan against shares offers a practical solution to access funds without selling your investments. This guide has covered the fundamentals, the working process, benefits, risks, and eligibility along with the step-by-step application process. Additionally, a clear comparison with other loan types helps you understand why opting for a loan against shares can be a more cost-effective and flexible option.
Before applying, ensure you thoroughly understand the terms, prepare all necessary documents, and choose a lender that offers favorable conditions based on your portfolio’s value. With careful planning and responsible management, a loan against shares can support your financial needs while preserving long-term investment growth.
If you have any questions or need further assistance, please contact us for expert guidance.