Banks and lending institutions often provide loans against securities to their users. However, you do not need to sell your securities as you can pledge them. The bank and concerned financial institution will provide you with an overdraft facility based on pledged securities.
Users can not only get loans against shares but also avail of the service by pledging their FD, insurance, and mutual funds. You have the option to get a loan amounting from Rs five lakhs to Rs five crore. Also, the interest rate can vary from 10% to 18%, depending on various factors.
Read this article to get more information about getting a loan against shares and financial securities.
How does a Loan Against Shares Process?
You need to open a current account in the respective bank to facilitate transactions. Here the interest rate is calculated on the amount withdrawn and the period used. The loan against securities comes in a short-term loan secured by keeping shares as collateral. If you need to get loans at an affordable interest rate. It can be a great idea to get a loan against shares. Generally, stocks are the company’s certificates which can be divided into two types such as common and preferred. The common category shareholders have voting rights in the company’s meetings.
Advantages of Getting a Loan Against Shares?
Getting a loan against securities is not the fastest way to get a loan. However, it can be considered the cheaper one. Because financial institutions and banks often charge interest rates two to three percent higher on LAS than on home loans. Also, getting a loan is a good option instead of liquidating the same. If you keep the shares as a pledge, it will keep growing per market growth. During the loan period, you will also be eligible to earn dividends, bonuses, and other benefits that a shareholder gets.
Along with this, you only need to pay interest on the amount you use. Banks give you an overdraft facility against the securities you keep. Furthermore, it is available for various securities like mutual funds and life insurance. Banks also do not charge any penalty if you pay the money in advance.
What Type of Shares or Securities are Accepted?
You might have a question on which type of shares the bank provides loans against shares. Most banks prefer top 50 or top 100 stocks to provide this facility. They may also provide the same on mutual funds and life insurance policies. If you use shares for a loan, banks will provide you a loan amounting to 50%-60% of the value of the shares. If you use other securities like FD, mutual funds, and life insurance. In that case, the loan amount can be higher than 50 percent. Sometimes, it is also seen that banks demand to pledge more securities if the share price decreases. Moreover, users also have the option to get a loan against bonds and ETFs. In both cases, you can get a higher loan amount against the value of these securities.
Documents Required
There are requirements of some documents to provide to avail of this service from financial institutions and banks. Below there is the list explaining the same to you.
- A passport-size photo, security document, identity, and resident proof.
- The user must be an Indian citizen and should be living in India.
- The minimum age for this type of loan stands at 21 years old.
- The user must have a stable source of income to pay the loan money easily.
- Furthermore, users must be either salaried or self-employed and have a minimum security value of Rs 10 lakh.
Should you Avoid Getting a Loan Against Demat Shares?
Getting a loan against Demat shares can be a convenient alternative. But you have to use it wisely and with the proper approach. Many investors prefer getting a loan against Demat shares to reinvest the money and make more profit. However, when the market falls down and hardly recovers back. The investors also have to face significant losses against their investments. Thus, it’s good to consider a normal loan facility to avoid market risk and balance the portfolio well. For example, suppose you need a loan for house expenses, wedding expenses, and education fees. In that case, you can consider other best options, as these will be less risky.
Conclusion
When you get a loan against securities or shares, your bank can also suggest you get a loan against Demat shares. But you must prefer a loan against securities; it can be a time taking process but also an affordable one. This credit facility will earn you dividends and bonuses on the pledged shares. Also, you will be able to repay the loan before the timeline without penalty. However, you must also read the bank’s and financial institutions’ guidelines carefully and prepare yourself to get the best benefit from this facility.