Investing in the share market is the most effective way to beat the ever-increasing inflation and grow your wealth in the long run. It also helps you save some extra bucks on taxes.
But did you know your equity shares can do more than that?
If you’re in urgent need of funds and have most of your money locked up in the stock market, you can easily take out a loan against equity shares by pledging them as collateral.
But that’s not all. Because a loan against shares is a secured form of credit, lenders usually offer a higher loan amount at competitive interest rates.
Let’s dive into how a loan against Demat shares work and the top 5 things you must know before applying for one.
How does a loan against shares work?
A loan or borrowing against shares allows you to mortgage your equity shares to access funds in times of a financial emergency. In such situations, while many investors panic and sell their shares, seasoned investors take out a loan against them to sail through the storm without liquidating their investments.
When you apply for a loan against equity shares, the lender will determine their present market value and offer a percentage of this amount as a loan. Based on the repayment conditions of your loan, you’ll have to make regular EMI payments to pay off the principal and the interest amount.
Things to know before applying for a loan against Demat shares
#1 Research well before selecting a lender
Different lenders will have different loan against shares eligibility criteria, interest rates, repayment conditions, etc. Therefore, you must compare your options carefully to enjoy maximum benefits.
It is always better to apply for a loan against shares with the same lender or financial institution that maintains your Demat account. This is because they already possess your shares, making it convenient and quicker to access the credit.
#2 Know the loan against shares eligibility
Before applying for a loan against your shares, make sure you’re eligible for it. While this will vary from lender to lender, here are some common loan against shares eligibility criteria that you must fulfill-
Your age must be between 18 and 65 years.
You can only pledge equity shares held by one or more individuals. This means you cannot pledge shares that are in the name of minors, NRIs, HUFs, and corporations.
You must also possess the required documents for verification, like ID proof, address proof, proof of income, and your DP account statement.
You must not be a director or a promoter of a company.
#3 Understand the benefits
If, like many investors, you’re planning to sell your shares to meet financial emergencies, you’ll be missing out on several benefits. This is because, with a loan against Demat shares, you continue to receive the benefits from your shares even after pledging them as collateral.
For example, you’ll continue receiving dividends, bonuses, extra shares, etc. And that’s not all. You’ll also continue to be the legal holder of the shares throughout the loan. This allows you to meet financial obligations conveniently while enjoying the benefits of your investment.
#4 Charges and fees
The guidelines of a loan against property are similar to an overdraft. This allows you to repay it anytime without worrying about the pre-payment charges.
However, besides the usual processing, maintenance, and closure charges, you’ll also have to bear a few other charges. For example, you’ll have to pay a pledge and de-pledge fee, followed by maintenance or renewal charges ranging between Rs. 1,000 and 10,000 depending on the lender. Further, you might also have to pay charges for cash withdrawals or deposits, ATM facility, NEFT, RTGS, etc.
#5 Things to avoid
Just like a personal loan, a loan against equity shares is multipurpose. And while it is a very convenient way to access credit, you must use it wisely.
Many borrowers use this amount to buy more shares. But the share market is volatile. If the market enters a bearish trend, you will not only lose a lot of money but will still have to pay interest on the loan. Therefore, make sure to use the borrowing against shares for genuine financial reasons like medical treatment, capital for business, home repairing, education, wedding, etc.
To Sum Up
A loan against shares is the best way to meet sudden financial obligations while continuing to benefit from your investments. But before applying for one, make sure you research well and check your eligibility, and use the loan smartly.
With Tata Capital’s loan against securities, you can enjoy a ton of other benefits like an overdraft facility, 100% digital process, security swap, high loan amount, and much more. Apply today.