Looking for Financial Assistance? Here are the Pros & Cons of Taking a Loan against Shares
It is now widely understood that investing in shares can be a lucrative opportunity for many. What is lesser known is that you can use your shares to get a loan when needed. Such a loan, known as a loan against securities, requires you to pledge your securities such as shares, bonds, insurance policies, etc. as collateral to access funds. To help you make an informed decision, here are some of the pros and cons of taking loans against shares.
What are the Advantages & Disadvantages of Loan against Shares?
Advantages of taking a loan against shares
The primary advantages of applying for a loan against shares are as follows:
Lower Interest Rates:
Since your shares function as collateral, a loan against shares and securities is a secured loan. Providing collateral gives the lenders an asset they can fall back on in case the borrower is unable to repay the borrowed amount or interest. Thus, the interest rates levied are also relatively lower as compared to other unsecured loans. However, to make the best decision possible, compare the interest rates levied by different banks and financial institutions before opting for a loan.
When you apply for a loan against shares, you can repay the borrowed amount any time without any fore closure charges *by simply depositing the funds in your OD account...
What’ more? With OD or Over draft facility you don’t have to worry about monthly EMI.
You pay interest only on the utilized amount and for utilized period. If you choose not to utilized the funds for some time, there is no interest charged.
If you opt for the demand facility, you choose to avail of the entire loan amount in one go. Your entire loan amount, including the interest, will be divided into equal monthly instalments, known as EMI. The overall limit of the amount extended to you will depend on various factors and vary according to the financial institution in question.
Although you use your shares as collateral, your investment is active in the market and you can continue to earn returns on the same. The lender will have no claim over the benefits earned on your investment. However, this is subject to you not defaulting on your repayments. You can also put the funds earned towards repaying the borrowed amount.
Since this type of loan is extended against your shares, there is no income proof or credit score that needs to be evaluated. Thus, the approval process is quite speedy, and the loan amount is disbursed to you swiftly.
Disadvantages of taking a loan against shares
On the other hand, the downsides of taking out a loan against shares are as follows:
Typically, lenders determine the interest rate, tenure, and the amount of a share-backed loan based on the value of the shares that are kept as collateral. The loan amount typically amounts to 50% of the portfolio value. Therefore, borrowers with lower-priced stocks may receive a lower loan value.
Unable to Sell Shares:
If you have pledged equity shares as collateral to get a loan against securities, you may find yourself unable to sell the shares without first repaying the loan in full. This could have a significant impact on both your portfolio value and the limit of the loan extended to you. Furthermore, you will not gain complete control of the shares until the loan amount has been paid in full.
Lenders only offer loans against securities if you pledge equity shares that are included in their official lists. If you are trying to pledge shares that are not in this list, your loan application might get rejected. Thus, before finalizing other details of the loan, make sure to check the lender’s list of securities.
A loan against shares can be a viable solution for those who are looking for short-term financial help, as it allows them to leverage their securities as collateral. However, it is important to consider the fact that this type of loan may also come with certain risks. With this information in mind, individuals can make an informed decision that best suits their financial goals and capabilities.
- Varies lender wise