Lenders often ask borrowers to pledge some of their assets as collateral when they apply for loans. That collateral acts as a security for the lender that they can use to recover their money, in case the borrower defaults on their loan. One such asset that borrowers can choose to pledge to raise a loan in times of need is their shares.
A loan against shares is one of the most convenient ways for investors to raise funds by pledging their demat account shareholdings. They can easily meet their monetary requirements if they are already an existing customer with a lender that offers this facility. However, the borrower must take note that shares of only selected companies qualify for this loan.
However, before opting for a loan against shares, investors should know the eligibility criteria, loan against shares interest rate and other aspects of the loan.
What is Loan Against Shares?
A loan against shares is a form of secured loan that individuals can apply for to meet their urgent financial needs. In such cases, borrowers do not need to sell their shares to meet their monetary needs. Instead, they can just pledge their demat holdings to a lender, who then creates an overdraft account for the borrower in return.
The concept is very similar to any other secured loan where the borrowers pledge their assets like a car, house, or land to get a loan. Once the borrower repays their borrowed funds at a fixed loan against shares interest rate, they can get their shares back.
Most lenders allow borrowers to pledge not just shares, but also other securities such as mutual fund units, bonds, etc., for a loan. However, it is still not a very popular form of loan and very few lenders offer it.
Eligibility Criteria for Loan Against Shares
The following are the eligibility criteria for a borrower to raise a loan against shares:
- The applicant must at least be above 18 years of age. Some lenders also keep the minimum age limit at 21.
- They must have a demat account and the securities to be pledged must be held in demat form.
- The borrower should either be of Indian nationality or they can be an NRI.
- Some lenders only extend this facility to their existing customers. New customers have to open an account with the lender before availing such a loan.
- The borrower must duly comply with all the KYC requirements.
- The credit score of the borrower must be above 700.
Features and Benefits of Loan Against Shares
Now that the borrowers are aware of the loan against shares interest rate, it is important to know what are the other features of this loan. Here are some pointers to explain the features and benefits of a loan against shares.
- Depending on the lender and the pledged securities, a customer can get a loan against shares ranging from Rs 25,000 – Rs 5 crore.
- Since it is a form of personal loan, the borrower can use it for multiple purposes, depending on his/her needs. The lender does not impose any end-use restrictions.
- Borrowers of the loan must have a registered demat account with a recognised depository participant.
- Borrowers are free to choose the shares they want to pledge. However, lenders have their specific criteria when it comes to accepting shares as collateral.
- The borrower is not allowed to sell off the pledged securities as long as the loan is not repaid in full.
- It is usually a paperless procedure and share pledging is also done online.
- Since it is an overdraft facility, the borrower shall pay interest only on the amount they use and not the entire loan value.
- It helps borrowers meet their personal and financial needs and also can be used to meet contingencies. They can meet their monetary needs without having to square off their shareholdings. Even if the borrower pledges dividend-yielding shares, he/she will continue to receive dividend payout as long as they are repaying the loan on time.
- The loan amount against the pledged securities is usually 50 -80% of the value of the securities pledged. So, if a borrower pledges shares worth Rs 1 lakh, depending on the lender, they can offer a loan of up to Rs 50,000 – Rs 80,000.
Loan Against Shares Interest Rate
Very few lenders in India offer this facility. The loan against shares interest rate usually starts at 8% and can go as high as 18%. If borrowers compare it with the interest rate of other personal loans, it is cheaper by 2-3%. Also, as this is a secured type of loan, the interest rate is lower than other financing options.
At the end of it all, the borrower must remember that it is still a type of loan and they need to pay it back on time. If they fail to repay the loan, they can also lose their securities. It is always better for investors to avail of this loan if they are sure about repaying it on time.