A loan against shares is a secured borrowing facility that usually allows individuals to use their listed shares in exchange for funds. Many people today are opting for this option to meet urgent requirements, as it helps them manage unforeseen financial needs without disturbing their existing investments. Such a facility usually helps in addressing emergencies while maintaining ownership of securities. This article explains the steps to apply for loan against shares, how interest rate of such loan works, and the benefits.
Steps to Apply for Loan Against Shares
Applying for a loan against shares usually involves simple steps. By applying for such loans, individuals may arrange funds during financial emergencies.
Choose a Reliable Lender and Apply
The process starts with selecting a reliable lender who offers a loan against shares facility. Once chosen the borrower submits a request to pledge eligible shares to avail the loan.
Provide Application Form and Documents
Along with the request, the borrower submits an application form and necessary documents, which usually include a PAN card, proof of identity, address proof, and Demat account details.
Verification and Lien Creation
The lender usually checks the borrower’s shareholding details to confirm eligibility. After verification, a lien is usually marked on the pledged shares in the Demat account.
Loan Disbursement
After the lien is successfully marked, the lender disburses the approved loan amount to the borrower’s account.
Repayment Options
Borrowers usually repay the loan using structured EMIs or overdraft facilities. This flexibility often allows them to align repayment with their financial planning and repayment capacity. Once the entire loan is repaid, the lender removes the lien on the pledged shares.
How Loan Against Shares Interest Rate Works
The interest rate on a loan against shares depends on multiple factors. Understanding these usually helps borrowers estimate borrowing costs and plan repayment effectively.
Type of Shares Pledged
The types of shares pledged usually have an important role in deciding the rate. Blue-chip and large-cap stocks usually have comparatively lower rates, as they are considered stable. Shares that are less liquid or highly volatile usually have higher rates because they carry comparatively increased risk for the lender.
Borrower Profile
The applicant’s overall financial profile is another important factor. Borrowers with a strong credit score and a stable income history usually secure a competitive rate. This is because a healthy repayment record reduces the lender’s perceived risk. On the other hand, a weaker profile may result in higher charges due to added credit risk for lenders.
Loan-to-Value Ratio (LTV)
The interest rate is also affected by the loan-to-value ratio. A higher LTV ratio usually means borrowing a larger portion of the share’s market value, which may result in higher interest. This is because a higher exposure usually increases the lender’s risk. Lower LTV ratios often come with more competitive interest rates.
Loan Tenure
The loan tenure may also influence the rate charged. Shorter repayment periods usually come with lower rates, while longer tenures may have slightly higher charges. Most lenders usually offer loans against shares for a period ranging between 12 and 36 months, depending on their internal policies.
Is Having a Demat Account Mandatory for Loan Against Shares
A Demat account is usually essential for availing a loan against shares. This is because listed shares are held in electronic form and must be pledged to the lender through the Demat account. Without a Demat account, the lender may not be able to mark the pledge. In addition, the transfer and monitoring of shares are usually possible only through such accounts. Hence, individuals holding shares in physical format may first need to convert them into Demat form before applying for the loan against shares.
What Makes Loan Against Shares a Suitable Choice?
This credit option offers certain benefits that make it a practical financing choice. These aspects usually help individuals during emergencies without the need to liquidate their investments.
Quick Access to Funds
Funds are typically disbursed faster than many other secured loans. The process usually involves simply applying through a reliable loan app, verification and approval, helping borrowers access funds during urgent financial requirements.
No Need to Sell Investments
Borrowers do not need to sell their shares, as they can pledge existing securities while retaining ownership. This usually allows them to continue holding investments even while using the loan facility.
Continue to Receive Dividend Payouts
Even after pledging shares, borrowers continue receiving dividends and bonus allocations. This ensures the investment continues to provide benefits while being used as collateral for the loan.
Competitive Interest Rate
Interest rates on a loan against shares are usually competitive. Since the shares are pledged as collateral, it reduces risk for lenders, resulting in comparatively lower borrowing costs.
Conclusion
A loan against shares usually offers a structured way to meet urgent financial requirements without selling existing securities. By pledging shares through a Demat account, borrowers may access funds quickly while continuing to receive dividends. Understanding factors like interest rates, loan-to-value ratios, and repayment options usually ensures improved management of the facility. With a clear application process and monitoring, such loans provide a practical borrowing option for addressing financial emergencies while maintaining control over investments.
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