What Are Loans Against Shares?
All You Need to Know About Loan Against Shares
What differentiates a loan against shares from all the other types of funding offered by banks and NBFCs in India is that here, the burrower pledges his shares to the lender to raise money against it. This means that the ownership and benefits of the shares remain with the borrower. So, essentially you earn extra on your investment. The term of the loan is generally one year and it is therefore considered an attractive and quick source of liquidity. There are various types of lenders offering this type of funding in India, including private and public sector banks, Limited Liability Partners, unincorporated lenders and NBFCs. Did you know that the RBI has issued guidelines for NBFCs to maintain a 50% loan to value ratio for loans against shares? This was done to prevent the volatility of the market due to offloading of shares.
he market due to offloading of shares.
When Should You Opt for Loans Against Shares?
According to an article in The Economic Times, mentioning RBI guidelines for loans against shares, the maximum loan amount on physical shares can be Rs 10 lakhs for banks and Rs 20 lakhs for demat shares. This type of loan is similar to personal loans and therefore can be used for a variety of purposes, including meeting wedding expenses, higher education tuition fees, business operation liquidity needs or any other urgent need. But you need to be mindful of the fact that the loan repayment term is only one year. So, unless you are sure you will be able to repay in time, you will need to consider other financing options. Moreover, before considering this option, you must also ensure that your share portfolio is healthy and that your shares are unlikely to fall very low.
What are the Risks Involved?
Knowing all about your loan is crucial and that is why it is prudent to be aware of the different risks involved in taking on a loan against shares. You should know that although the interest rates in this category are lower than for personal loans or several other options, there is still a very high margin involved. The banks can maintain margins as high as 70% to 80% on your loans, given that shares are a part of a volatile market and their prices may fall or rise unexpectedly. As also mentioned in a DNA article, if you pledge your shares worth Rs 10 lakhs, you will only get Rs 5-7 lakhs as the loan amount. There are chances that the prices of your shares decline. In such cases, you will need to add money to the account. In case of failure to repay, the bank may sell your shares to cover their losses.
What are the Benefits?
According to an article on Rediff about quick money, loans against shares are preferred because they are secured loans, so the interest rates are lower. There is a flexibility of using the money for any purpose. No guarantor is required and you can easily apply online. Having a demat account makes it even quicker. The biggest advantage is that you can get instantly withdraw any amount and the interest rates are charged on that amount alone. You can still avail benefits like dividends and bonuses from your shares, since the ownership still lies with you.
What You Should Keep in Mind Before Applying for a Loan
This type of funding can be obtained with minimal paperwork. It generally gets approved within a week. So, make sure you have the required documents, such as identity and birth date proof, income and demat account statements, etc. There are various companies that lessen the legwork and make the application process convenient online, so check the process on the company’s website after thoroughly checking the FAQs or contacting customer care. And do not think of raising a loan against shares for investing in speculative markets, which will increase your risk further!