A loan against shares is when you borrow money using your shares as a promise to repay. Let’s say you own 100 shares in a company, and each share is worth ₹50. That’s ₹5,000 in total. Instead of selling them, you give them to a bank or Non-banking Financial Companies (NBFCs) as security. They give you a loan based on what your shares are worth. You pay the money back later through Equated Monthly Instalment (EMI) and then get your shares back.

How Does LAS for Emergencies Work?

Here’s how a loan against securities works:

• You Need Shares: You must own shares in a company. These are usually kept in an electronic account called a demat account.
• Find a Lender: Go to a bank, NBFC, a finance company, or sometimes a stockbroker. Tell them you want a loan and show them your shares.
• Check the Value: The loan provider evaluates the value of your shares but typically offers only 50% to 70% of that amount. For example, if your shares are worth ₹10,00,000, you could receive ₹5,00,000 to ₹7,00,000, subject to lender discretion.

Note: It is important to remember that the percentage of loan you are approved of varies by lending institution.

• Give Shares as Security: Sign a contract saying the loan provider can hold your shares until you pay back. You still own them, but you can’t sell them yet.
• Take the Cash: After they agree, the money goes to your bank account. This can happen in a day or two, which is excellent for emergencies.
• Pay It Back: You must return the loan in EMI each month, plus some extra called interest. You will get your shares back once the loan amount is paid back.

Why Use Loan Against Securities in Emergencies?

When you face an emergency and need cash fast, a loan against securities can be a smart choice. Here’s why this borrowing option stands out with its advantages:

• Quick Access to Funds: You can get money quickly, usually within a day or two, entirely depending upon the bank or NBFC policies. Compare that to selling shares, which takes more time and depends on market conditions.
• Retain Ownership of Your Shares: With this option, you don’t have to give up your shares. They stay yours, and if their value increases while you repay the loan, you benefit from that growth.
• Lower Interest Rates: Since your shares act as security for the loan provider, they take on less risk. As a result, the interest rates are often lower depending on the loan provider, compared to standard loans.
• Flexible Use of Funds: The borrowed cash can go toward anything you need. Whether it’s covering a medical bill, repairing your car, or supporting your business, there are no restrictions on how you use it.
• No Need to Sell: If you believe your shares will rise in value over time, you don’t have to sell them at a lower price now. You keep them and avoid missing out on future gains.

Conclusion

Using a loan against shares is a smart way to get quick cash in an emergency without selling your investments. It’s often cheaper than other loans and lets you keep your shares. But remember, share prices can change, and if you can’t repay, you might lose your shares. To use this wisely, borrow only what you need, have a clear repayment plan, and watch your investments closely. This option can help during sudden money problems, but be ready to handle the risks and responsibilities involved.

FAQs

What is a loan against shares, and how does it work?

A loan against shares is a loan where you pledge your stocks or mutual funds as collateral to secure a loan from a loan provider. It works by the lender, giving you a loan amount determined based on a percentage of the market value of the securities pledged.

What are the advantages of using shares as collateral for loans?

The key advantage is that you can access funds without selling your shares. Additionally, interest rates tend to be lower than other unsecured loans since shares are tangible assets that can be liquidated.

What types of shares can be used to secure a loan?

Equity shares, bonds, government securities, mutual funds, and exchange-traded funds can be pledged to secure a loan. Financial institutions typically accept shares of stable, high-quality companies as collateral.

How is the loan amount determined when using shares as collateral?

The loan amount depends on a percentage of your shares’ market value, called the margin. Usually, this is 30% to 50% of the shares’ worth, subject to lender approval. The lender ensures the loan stays lower than the value of your pledged shares to keep the collateral safe. However, the margin is usually subject to vary from one lender to another.

Can I access multiple loans against different shares?

Yes, you can use multiple loan facilities against different shares from the same lender or loan providers simultaneously. The total cumulative amount should be within approved margins so collaterals are not over-leveraged.

How do interest rates on these loans compare to other types of loans?

Interest rates on loans against shares typically range from 10-20% per annum, subject to lender policy. Since shares are tangible assets that can be liquidated, they are usually lower than personal, business, or credit card loans. However, actual interest rates and terms can vary depending on the lender.

What should I consider before taking out a loan against my shares?

Before taking a loan against shares, consider factors like whether you can pay back the amount with interest, potential stock volatility and its impact on collateral value and loan limits, and the risks of being unable to repay on time.

What happens if I am unable to repay the loan on time?

If you default on timely repayment, the loan provider can liquidate some or all pledged shares to recover dues. This may entail financial loss if share values have dropped since the loan was taken. The loan provider may also take legal recourse to recover shortfall amounts.