Personal finance is a puzzle that often demands innovative solutions, especially when you’re looking for financial support to meet your goals or tackle unexpected expenses. One such solution that has gained prominence in recent years is a ‘loan against equity shares’.
What is a Loan Against Equity Shares?
Let’s start by demystifying the term itself. A ‘loan against equity shares’ is a financial product that allows individuals to leverage their equity investments in the stock market as collateral to secure a loan. In other words, this type of loan allows you to unlock the value of your existing shares without having to sell them. This unique financial arrangement serves as a bridge between your investment portfolio and your immediate financial needs.
But why is this relevant in the context of personal finance?
Imagine you are sitting on a portfolio of equity shares, which you have diligently built over the years. These shares represent a significant chunk of your wealth, and you believe in their potential for future growth. However, life doesn’t always align with your financial plans. An unexpected expense or a lucrative investment opportunity may arise when you least expect it.
This is where a loan against equity shares comes into play. It empowers you to access funds quickly and conveniently, without having to liquidate your valuable investments. You can maintain your equity holdings, potentially benefit from future market upswings, and still meet your financial goals today.
Important Factors to Consider Before Taking A Loan Against Equity Shares
If you are considering borrowing a loan against equity shares you have, you must know the following aspects of loans against equity shares to make the right call:
#1: Eligibility Criteria
Before you consider applying for a loan against equity shares, it’s crucial to understand the eligibility criteria. Here are the key factors that lenders typically look for:
- Demat Account: To be eligible for this type of loan, you must have a Demat (Dematerialized) account. This account is essential as it holds your equity shares in electronic form, making them accessible for pledging as collateral.
- Eligible Shares: Not all shares are accepted as collateral. Lenders usually have a list of approved securities that can be pledged. These shares are often from well-established and reputable companies. It’s vital to check whether your shares are on the lender’s approved list or not.
- Loan-to-Value (LTV) Ratio: The loan amount you can receive against your equity shares is determined by the loan-to-Value (LTV) ratio. LTV is the ratio of the loan amount to the market value of the shares you’re pledging. Typically, lenders offer loans with an LTV ratio ranging from 50% to 70%. The higher the LTV, the larger the loan amount you can secure.
- Creditworthiness: While the primary collateral for this loan is your equity shares, lenders may also assess your creditworthiness. Factors like your credit score, repayment history, and financial stability can play a role in the approval process and the interest rate you’re offered.
- Age and Income: Some lenders may have age restrictions, and you may need to demonstrate a minimum income to qualify for a loan against equity shares. For example, you cannot borrow a loan against equity shares if you are under 18 years old or earn less than Rs. 15,000 per month. However, these requirements can vary from one lender to another, so it’s essential to check with your chosen lender.
#2: Amount and Interest Rates
Once you meet the eligibility criteria, it’s time to understand how the loan amount and interest rates are determined:
- Loan Amount: The loan amount you can avail of depends primarily on the LTV ratio and the market value of the shares you’re pledging. As mentioned earlier, LTV ratios typically range from 50% to 70% of your share value. To calculate your maximum loan amount, multiply the LTV ratio by the market value of your shares.
For example, if the market value of shares for which you want to take a loan is Rs. 50,000, then you can get a loan of up to 70% of this value. Therefore, you can get a loan of up to Rs. 35,000. Keep in mind that lenders may impose a maximum cap on the loan amount.
- Interest Rates: Interest rates for loans against equity shares are generally lower compared to unsecured loans. They often depend on various factors, including market conditions, the quality of your collateral, and your creditworthiness. It’s advisable to compare interest rates from different lenders to secure the best deal.
If you require a loan and do not have sufficient equity shares, or simply do not want to risk them, you can consider borrowing a collateral-free personal loan from Finnable. You can use the loan amount for any investment you want to make and enjoy other perks like fully digital processing and interest on reducing balance.
#3: Risks and Benefits of Loans Against Shares
Understanding the risks and benefits of loans against equity shares is crucial for making an informed decision:
–Liquidity without Selling: You can access funds without selling your shares, allowing you to benefit from potential future appreciation.
–Lower Interest Rates: These loans typically offer lower interest rates compared to unsecured loans.
–Quick Disbursal: The loan approval process is often faster since it’s primarily based on the collateral.
–Market Volatility: If the market value of your pledged shares falls significantly, you may need to pledge additional shares or repay the loan to maintain the required LTV ratio.
–Loss of Shares: In extreme cases, if you’re unable to repay the loan, you risk losing your shares.
#4: The Application Process
Applying for a loan against equity shares involves several steps:
Step 1- Choose a Lender: Research and select a lender that offers favorable terms and suits your needs.
Step 2- Gather Documents: Collect the required documents, including KYC documents, proof of share ownership, and any additional documentation the lender requests.
Step 3- Pledge Shares: Pledge the approved shares in your Demat account as collateral.
Step 4- Loan Application: Complete the loan application form provided by the lender, and submit it along with the required documents.
Step 5- Evaluation: The lender evaluates your collateral, creditworthiness, and eligibility.
Step 6- Loan Approval: Upon approval, the lender disburses the loan amount to your bank account.
Step 7- Repayment: Repay the loan in accordance with the agreed terms, including interest and any other charges.
#5: Loan Against Equity Shares in India
The following loan providers offer loans against equity shares in India, along with reasonable interest rates:
|Loan Against Shares Provider||Interest Rates (per annum)|
|Bajaj Finserv||Up to 20%|
|HDFC Bank||6.50% – 10.84%|
|ICICI Bank||Up to 16.80%|
|Angel One||9% – 12%|
|State Bank of India||8.55% – 11.05%|
|Kotak Mahindra Bank||8.5% to 11%|
|Aditya Birla Capital||20.25%|
|Axis Bank||11.50% – 13.75%|
Note that, the term you may receive on your loan against equity shares may depend on other factors, such as your LTV ratio, the loan amount you, and the duration of your loan.
Understanding the intricacies of loans against equity shares empowers you to make well-informed financial decisions. These loans can be a valuable tool in your financial toolkit, providing access to funds while preserving your investments. However, it’s essential to carefully weigh the benefits against the risks and choose a lender that aligns with your financial goals.
Understanding your eligibility for taking a loan against equity shares and the interest rates and amount you can receive is important. Carefully evaluate the risks and benefits of applying for a loan against equity shares before you make the decision. Using your portfolio of shares, you can enjoy a loan with reasonable terms while watching your money grow.