Loan Against Shares

What is a Loan Against Shares (LAS)?

Loans against shares or securities are when you borrow money using things like stocks, bonds or insurance policies as collateral. They're handy when you need cash fast for personal or business needs. These loans can last from short to long term with repayment periods of up to three years. The specific securities accepted and loan amounts vary by lender with loans going up to Rs. 20 lakh.

Getting a loan against your shares helps you manage your money better. It stops you from rushing to sell your shares when you need cash. The amount you can borrow is based on how many shares you have and which bank you're borrowing from.

How does a Loan Against Shares work?

When you pledge your market shares the bank offers you an overdraft facility using those shares as collateral. This means you can withdraw money up to a certain limit. The interest you pay is only on the amount you actually withdraw not the total loan amount.

For example, if you borrow Rs. 2 lakhs but only withdraw Rs. 1.5 lakhs you only pay interest on the Rs. 1.5 lakhs. Additionally, you can involve family members like your spouse, parents or siblings above 18 by pledging their shares too. However, they need to be co applicants and sign agreements. This arrangement provides flexibility in borrowing and reduces interest costs, making it advantageous during financial crunches. It's important to understand the terms and ensure everyone involved comprehends their obligations before proceeding.

What types of securities can be used as collateral for a Loan Against Shares?

For a Loan Against Securities various types of approved securities can be used as collateral including:

1. Equities: These are stocks or shares of companies listed on the stock exchange. They are commonly used for LAS due to their high market value and liquidity. However, their value can fluctuate affecting the loan amount.

2. Mutual Funds: These investment funds pool money from many investors to invest in stocks, bonds or other assets. They offer a diversified portfolio and steady returns but are still subject to market fluctuations.

3. Fixed-Income Securities: This category includes bonds, debentures and fixed deposits which pay a fixed interest rate. They are less risky than equities but usually offer lower returns.

4. Exchange Traded Funds or ETFs: These funds track a basket of assets like stocks or commodities and trade on the stock exchange. They provide diversification, low costs and liquidity but their value can also be volatile.

5. Insurance Policies: Some lenders accept insurance policies such as endowment policies, money back policies or Unit Linked Insurance Plans or ULIPs as collateral for LAS.

Different securities can be used for LAS each with its benefits and risks including equities, mutual funds, fixed income securities, ETFs and certain insurance policies.

Eligibility criteria to avail of a Loan Against Shares

Eligibility criteria for a Loan Against Securities can differ between lenders but generally include the following requirements:

1. Nationality: You must be an Indian citizen or resident.
2. Age: You need to be at least 18 years old.
3. Demat Account: You must have a Demat account with enough eligible securities to use as collateral.
4. Credit Score: You should have a good credit score and repayment history.
5. Income: You need to have a stable income to show you can repay the loan.
6. Collateral Value: The value of the securities you pledge should meet the lender's minimum requirements.
 

Features of Loan against Shares

A loan against shares involves borrowing money using your shares as collateral. Here’s how it works:

1. The loan is secured by shares including government securities, corporate securities and debentures.
2. These shares act as protection for the loan.
3. If you fail to repay the loan the lender can sell the shares to recover the money.
4. This type of loan gives the lender confidence because they can get their money back through the shares.

Benefits of Loan against Shares

1. Access to Funds Without Selling: You can get money without selling your shares which is great if you think their value will go up.
2. Fast Approval: LAS loans are approved quickly because your shares serve as collateral reducing the lender's risk.
3. Low Interest Rates: Since your shares back the loan interest rates are usually lower than unsecured personal loans.
4. Flexible Loan Terms: You can choose the loan period that suits your financial goals and repayment ability.
5. Tax Benefits: Sometimes the interest on LAS loans can be tax deductible which can save you money on taxes.
6. Keep Your Investments: You still own your shares and can benefit from any future gains in their value.
7. Versatile Use of Funds: You can use the loan for various needs like investing, consolidating debt, home improvements or business expenses.
8. Easy Repayment: LAS loans often come with simple and convenient repayment options.
 

Documents are required to apply for a loan against Shares

Most lending institutions require some basic documents like KYC documents (photocopies of PAN Card, address proof, identity proof), bank statements and proof of income. Depending on your category you'll need additional documents:

• Limited Companies
• Partnership Firms
• Self-employed individuals
• Salaried individuals

You can check the exact documentation requirements and eligibility criteria on the lender's website or visit a nearby branch for more details.
 

Steps to apply for loan against Shares

Applying for a loan against your stocks involves several steps which might vary slightly depending on the lender. Here’s a simplified version of the process:

Find Lenders: Look for banks or financial institutions that offer loans against shares.

Check Eligibility: Make sure your shares qualify for the loan.

Apply: Fill out the loan application form and provide your KYC documents (proof of identity and address).

Offer Shares as Collateral: Give the lender documentation that shows they have a claim on your shares.

Wait for Approval: The lender will review your application and if you meet their criteria approve the loan.

Receive Funds: Once approved the funds will be deposited directly into your designated account.
 

Conclusion

A Loan Against Securities is a type of loan where you can use your financial assets, like stocks, mutual funds or bonds as collateral to get a loan from a lender. With LAS you can borrow a certain percentage of the market value of these assets. This type of loan is becoming popular because it offers more flexibility and is often cheaper than traditional loans. The interest rates for LAS are usually lower compared to other unsecured loans making it a cost effective borrowing option.