A loan against shares is a way to access funds quickly by using your shares or securities as collateral, instead of selling them. This means you can retain ownership of your assets without selling them and get the funds needed to fulfil financial requirements. Loans are approved based on the market value of the shares and the lending institution policy. The article discusses in detail what a loan against shares is, how does it work, and how you can use it for immediate funding.
What is a Loan Against Shares?
A loan against shares is a secured credit facility where you pledge your share in exchange for a loan. The lender evaluates your holdings and usually offers a loan up to a percentage (called the Loan-to-Value ratio) of your securities’ market value. You do not need to sell your shares, which means you may continue receiving dividends or bonuses. This loan is available to individuals who hold shares or other eligible securities like certain bonds or mutual funds.
How is the Loan Granted?
To obtain a loan against shares, you need to pledge your securities. This can be done either physically or digitally. The lender will consider the current market value of your shares to determine the loan value. After approval and formalities, the loan amount is transferred to your account, usually as an overdraft. You pay interest only on the part of the amount you use and for the time you use it.
How to Use Securities for Immediate Funding?
Using your shares for immediate funding may suit those who need quick funds but want to keep their investments intact. You can use funds for:
- Business Expansion: Immediate funds may help small businesses grow or manage daily operations without selling assets.
- Medical Emergencies: You can quickly get funds during the time of emergencies by pledging shares for a loan. This can help during personal emergencies without affecting longer-term plans.
- Consolidation of Higher-interest Debt: You can use this loan to repay existing debts that carry higher interest rates. By doing so, you may reduce your overall interest burden and simplify your repayment.
Features of Loan Against Shares
Some of the features of loans against shares include:
- Flexible Repayment Options: Some LAP structures allow only interest payments during the initial period, with the option to repay the principal later, depending on the lender’s terms.
- Eligibility Requirements: You must own lender-approved shares, bonds, or securities. This is because only approved financial instruments serve as acceptable collateral for this loan.
- Easy Funding Options: You can receive your funds as an overdraft, with access to withdraw whenever you want.
- Range of Accepted Securities: You may obtain this loan by pledging various sorts of assets, such as shares, mutual funds, bonds, or even certain insurance policies, if allowed by the lender.
Understanding Loan Against Securities Interest Rates
Interest rates on loans against shares are usually affordable because the loan is secured by the shares pledged as collateral. However, there are several factors that determine the loans against securities interest rates:
- Type of Security Pledged: Interest rates might likely vary depending on the type of shares, mutual funds or bonds pledged for the loan.
- Borrower’s Credit History: Borrowers with higher credit scores generally get lower interest rates as lenders see them as less risky and more likely to repay on time. A good history of credit helps secure better terms.
- Lender’s Policy: Each lender sets its own interest and terms for loans; therefore, the rates tend to vary.
Moreover, remember that the interest is charged on the amount borrowed. Some lenders may also impose default renewal fees or processing fees.
Benefits of Loan Against Shares
Some advantages of getting a loan against shares include:
- Keep Ownership and Benefit: You keep legal title to the assets, and you may also continue to receive dividends and bonuses while borrowing against your shares without having to sell them.
- Access Funds Quickly: Loan approval and disbursal can occur within 1-2 business days, allowing you quick access to funds.
- Funds for Multiple Purposes: From business needs to personal expenses, this loan covers various short-term requirements.
- Simple Application Process: Many lenders offer easy online pledging portals, enabling applicants to submit documents digitally.
Points to Remember When Taking a Business Loan Against Securities
The following is the breakdown of several important factors that one should remember when taking a loan against share:
- Eligible Securities: Check with your lender which shares or bonds are allowed as collateral before applying.
- Changes in Securities Value: If share prices drop, your collateral decreases, so you may need to either pledge additional securities or repay part of your loan.
- Margin Calls: A market dip may lead the lender to request additional security, requiring prompt response to maintain access to borrowed funds.
- Risk of Selling Securities: Lenders may sell pledged shares if you fail repayments or margin calls, so always monitor your obligations and market trends carefully.
Conclusion
A loan against shares is a practical way to get immediate funds by using your existing securities as collateral while remaining the owner. The interest rates tend to be affordable, and the process is relatively quick and flexible. However, understanding the eligibility, closely watching the loan against securities interest rates, and managing repayments carefully are key factors. This lending option may help you meet urgent financial needs without selling investments prematurely and disrupting your financial goals.
