In a world where credit is often difficult to come by, a loan against shares has emerged as a viable alternative. A loan against shares is, as the name implies, a loan taken out by an individual against the shares they own in a publicly traded company. In this article, we’ll provide an overview of what a loan against shares is, how it works, and who is eligible to take out such a loan.
Table of Contents
What is a Loan Against Shares?
A loan against shares (LAS) is a type of loan that uses the value of an individual’s stocks or shares as collateral. This type of loan is typically provided by banks or financial institutions. LAS is also known as securities-based lending, as lenders use the shares as security to provide credit.
How Does it Work?
To get a loan against shares, an individual needs to pledge the shares he or she owns as collateral with a lender. The lender then provides a loan equivalent to a percentage of the value of the shares pledged. This percentage can vary from lender to lender but is typically between 50% to 80% of the market value of the shares.
The loan agreement will also specify the interest rate charged by the lender on the loan amount. The interest rates for loans against shares are usually lower than unsecured loans like personal loans or credit cards. This is because the shares pledged as collateral significantly reduce the risk to the lender.
Who is Eligible for a Loan Against Shares?
Not everyone who owns shares can take out a loan against them. There are certain loan against shares eligibility criteria that a borrower must meet to be able to borrow against their shares:
1. Ownership of Shares: Only individuals who own shares in a publicly traded company can take out a loan against them. The shares must be in the name of the borrower and must be free from any encumbrances.
2. Minimum Value of Shares: Most lenders have a minimum value requirement for the shares pledged. The value of shares typically needs to be in the range of Rs 1 lakh to Rs 5 lakhs. Lenders prefer shares of blue-chip companies that are part of the Nifty or Sensex.
3. Margin Requirements: Lenders may require a specific margin of shares to be pledged to be eligible for a loan against shares. For example, a lender might require the borrower to pledge shares valued at Rs 2 lakhs to be eligible for a loan of Rs 1 lakh.
4. Loan to Value Ratio: As mentioned earlier, lenders typically provide loans between 50% to 80% of the value of the shares pledged. This means that if a borrower pledges shares worth Rs 5 lakhs, a lender may provide a loan between Rs 2.5 to Rs 4 lakhs.
5. Creditworthiness: While the shares are used as collateral, lenders still evaluate the creditworthiness of the borrower before providing a loan against shares. Lenders check the borrower’s income, credit score, and credit history before approving a loan.
Benefits of a Loan Against Shares
1. Lower Interest Rates: As mentioned earlier, the interest rates for loans against shares are generally lower than unsecured loans like personal loans or credit cards. This is because the shares pledged as collateral significantly reduce the risk to the lender.
2. Quick Processing: Loans against shares can be processed quickly as the lender already has the collateral in the form of shares. This makes LAS a useful option in times of urgent financial needs.
3. No Need to Sell Shares: Borrowers do not need to sell their shares to raise funds. By pledging shares as collateral, they can maintain ownership of their stocks and still access quick cash.
4. Liquidity: By taking out a loan against shares, borrowers can access liquidity without having to sell off their shares or compromise on long-term investment goals.
5. Flexible Repayment Options: LAS usually comes with flexible repayment options. Borrowers can choose to pay back the loan amount in lump-sum or in installments, as per their preferences.
Conclusion
A loan against shares is a secure way to borrow money for individuals who own shares in publicly traded companies. This type of loan provides lower interest rates, quick processing, no need to sell shares, liquidity, and flexible repayment options. However, individuals must meet certain eligibility criteria to be eligible for a loan against shares. It is essential to evaluate the pros and cons of taking a loan against shares before deciding to opt for one. As always, it is advisable to seek professional advice before making any financial decisions.
