What is the concept of Loan against Shares?
With consumer spending on an unprecedented highs and loans getting all the more expensive due to higher rates of interest, many individuals are seeking new ways to fulfill their money requirement. And a very reliable and a quick way to procure a loan is loan against shares.
So, now you must be thinking, what exactly is a loan against shares? A relatively new entrant into the market, loan against shares falls under the category of loans against securities). It is not known to many people because the banks do not advertise it often. Loan against shares is available in the form of a Line of Credit facility which is pledged against financial securities like shares, units and bonds.
One of the primary reason people go for this loan is that to preserve investment, apart from taking care of personal needs. Another reason people harbour such a loan is to meet their immediate emergencies of money and get liquidity without actually having to sell the shares. Another the good thing is that, when you pledge your shares to the bank, you still get to enjoy all the dividends and bonus shares, and also retain the ownership.
The advantage of loan against shares is that you will be charged interest only on the amount you withdraw from the account and for the span of time the fund is utilized. It is devoid of any hassles and you can spend the amount in any manner. So long the market is going strong and high, you will have no problem in getting the loan because banks value the shares every week to gauge the amount of loan that can be available to you. Another great aspect of availing a loan against shares is that not only your own shares, you can also pledge the shares of your spouse, children (above 18 years of age), parents, siblings (brother or sister), in laws, grandparents and even grandchildren
The amount of loan that can be availed is usually from 50% to 70% of the value of the shares that are pledged with the bank. Banks also have a fixed range and criteria regarding the amount for which a Line of Credit can be availed. The range is usually between Rs. 50,000 (minimum) to as much as Rs. 2000,000 (maximum). However, you cannot get a loan against all the shares as banks usually dictate and already have a list of companies and high quality securities against which you can receive a loan. The drawing limit is primarily based on the value of your securities. The loan against shares interest rates generally varies around 12 per cent and 15 per cent per annum. You can negotiate upon the interest rate if you avail a higher amount.
The loan against shares process:
- After you complete and submit the loan application with all share certificates and other necessary documents, a current account for Line of Credit will be opened in your name.
- After this you withdraw the money till the amount sanctioned and interest is charged for the number of days you use the amount.
It is advised that you take a loan against equity (shares or debentures) only when you are expecting some return of money after a few months and you require some funds in the short-term.
When the share prices rise, the banks will be able to give you a higher amount of loan but when the value of whatever portfolio you have, falls, banks will ask you to pay the difference by cash or by pledging more shares. And this could prove fatal if you do not happen to have the requisite cash as banks could sell your stocks to recover the loan amounts. You also need to pay the interest installment every month failing which, you would reminder calls from the bank and could later on even sell the shares. Also, a surplus interest of 2% p.a. can also be charged on the amount if the outstanding amount exceeds the time limit.
Make sure that the benefits you would derive would be more than the cost you have to incur, which would include interest and processing fee. And make sure that you pay it back at the first opportunity. Make sure that you look at the various charges such as renewal fee, processing fees, one-time fee, government levies, and service taxes. Carefully consider the risk involved in such a move.