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Tata Capital > Blog > Loan on Securities > Pros & Cons Of Taking Loan Against Shares

Loan on Securities

Pros & Cons Of Taking Loan Against Shares

Pros & Cons Of Taking Loan Against Shares

Boom! Crash! You will hear these words around Dalal Street every few days. No, that is not an accident-prone area. It is the sound of the stock market going up and down.

The market's volatility regularly creates winners and losers. In such a scenario, what if you need urgent funds? Are your shares of any help?

Yes, indeed. Several financial institutions offer loan against securities for customers’ short term funding needs. Loan against shares, government bonds, insurance policies, and other investments come under this category, giving people the opportunity to fulfil their dreams without liquidating their investments.

But, like other things, a loan against securities has its pros and cons. Below are some essential points to help you make an informed decision. 

The Pros

Lower interest rates

A loan against securities of any type has a lower interest rate than most unsecured loans and credit cards, as it is a secured loan. That means borrowers can pledge the shares as collateral for taking a loan. Depending on your stock list, a loan against shares' interest rate can go as low as 10.5%. Before taking a loan, you should compare the low-interest rates of a loan against shares and choose the one that suits your needs.

Flexible repayment options

There are two types of repayments options for a loan against securities:

  • Overdraft
  • Demand

In an overdraft facility, the lender limits the borrowing against shares pledged. You can choose to borrow any amount within the limit. The interest will depend on the loan amount borrowed and the tenure. Also, the limit is revised every year to adjust the loan against the current value of shares.

So, if the value of your stocks rises, your limit on the loan against shares will also increase. Under this scheme, lenders also give you the option of repaying only the interest every month, allowing you to repay the larger amount (principal) at the end of the loan tenure.

The demand facility allows you to borrow the whole loan amount at once. Your total repayment amount (principal + interest) is divided into EMIs throughout the loan tenure. You can borrow up to Rs. 20 lakhs, as it is the loan against shares maximum limit set by many financial institutions. But this limit can be revised upon negotiation, depending on your stock list and credit scores.

Continued returns and dividends

In cases of loans against securities, the units remain invested in the market, and you can avail all the benefits of your investments. Whether it is a dividend from preference shares or an interest income from a bond, the lender has no authority over these payments. You can continue receiving gains from your investments as long as you do not default on your repayments. You can use this extra income to pay off your EMIs or save for your future.

Easy processing

Any income proof or credit score does not determine the loan against shares eligibility. Since these are secured loans, the lender defines the loan against shares interest rate, tenure, and other specifications purely based on the stock list and its value. This simplifies the loan approval process. In addition, the loan amount will be credited to you in two or three days. Therefore, a loan against shares proves to be a convenient option for many borrowers requiring emergency funds.

The Cons

Low loan to value

The lender will decide the loan against securities’ interest rate, amount, and tenure depending on the value of your securities pledged. Usually, it amounts to 60-80% of the collateral's value. This can be a setback for those who want a large amount or have low-priced stocks.

Cannot sell shares

In cases of loan against equity shares, not being able to sell the shares at the correct time can be a disadvantage for shareholders. If a share value decreases drastically, it can significantly reduce your portfolio's worth. The lender can then lower the loan against shares’ maximum limit and ask you to repay some amount from the principal. You can gain full authority over your investments after repaying the loan entirely. 

Not suitable for home loans

Generally, the loan against securities interest rate is 2-3% higher than a home loan. Also, in this real estate market, a borrower will need the loan to cover a large portion of the property’s cost. Due to various restrictions on loans against shares eligibility criteria, you will need an extensive portfolio of high-value stocks to borrow such a large amount.

Stocks should match the lender's list.

A lender can provide a loan against equity shares on only those stocks that are included in the lender's official list. This is done to maintain the credibility of the stocks pledged by borrowers. If your portfolio has shares of companies not listed with the lender, there is a high chance that your loan application will be rejected. Therefore, it is always advisable to check the list before discussing other details like a loan against shares’ interest rate, total amount, or tenure.

The bottom line

Securities are valuable assets not only today but also for your financial future. Therefore, before taking a loan against equity shares or other valuable investments, you should do thorough research. To get started on this endeavour, check out Tata Capital’s website. Understand and explore their key features like loan against securities’ interest rate, auto-renewable tenures, and zero prepayment charges.

It is better to take a loan than redeem your shares for lower values when the market is down. Make sure you are not over-leveraging yourself. Assess your financial capability thoroughly and enjoy the benefits from it.

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