Loan Against Your Stocks in a Bull Market

Is now a good time to avail loans against your stocks?

Photo by Joshua Mayo

Many individuals are still facing the financial impact of the COVID-19 pandemic and are not in a situation to repay their debts. This has resulted in increased defaults in personal loan repayments. As a result, banks and Non-Banking Financial Companies (NBFCs) are restricting the disbursements of unsecured loans.

Nevertheless, it is possible for you to get a loan you require — for whatever purpose — making the optimal use of your investments in equity shares. And what could be a better time than now, when the S&P BSE index has scaled a historic high and market experts expect the rally to continue further (backed by certain positive factors).

Yes, if you are thinking of availing a loan, you may consider doing so by pledging your equity shares. In other words, you can take a Loan Against Shares. It could be a wise choice if you urgently need a sum of money for a contingency or any other expense, as opposed to taking a personal loan that levies a higher interest rate.

What is Loan Against Shares?

A loan Against Shares is a type of loan against securities, which can be obtained by pledging your equity shares held in the Demat account to the bank or Non-Banking Financial Company (NBFC). So, as a borrower, you do not have to liquidate your investment in shares to raise funds. The equity shares in the Demat that are pledged, serve as a security to the lender who provides the loan. Loan Against Shares, are usually offered as an overdraft facility, making it flexible for you to repay the loan.

The key features and benefits of Loan Against Shares are as follows…

1. The rate of interest is in the range of 9.5% p.a. to 12% p.a., noticeably lower than the rate of interest on a personal loan. In addition, a nominal processing fee is charged at the time of the loan application.
2. There is no requirement of additional security apart from the shares you pledge. Plus, there is no requirement for a guarantor to avail of this loan.
3. Your investments in shares continue to grow while it is pledged with the lender. In addition, you get all the benefits of owning the shares, such as dividends and bonuses that are declared over time.
4. Each lender has a list of shares that they accept as collateral. It ensures the lender does not have to face losses during market dips.
5. The lender usually assesses the value of the pledged shares on a weekly basis.
6. The maximum loan you can avail of is up to 50% of the value of shares held in the Demat Account.
7. The loan is typically offered as an overdraft facility. So you pay interest only for the amount you utilize on a pro-rata basis.
8. The maximum loan tenure is generally 36 months. However, it is advisable to not extend the loan for longer than several months.
9. There are typically no prepayment charges for Loan Against Shares. In the case of default in the loan repayment, the lender holds the right to liquidate your shares fully or partially to recover the due amount.

What is the eligibility criteria to avail of Loan Against Shares?

There are no strict criteria to avail of Loan Against Shares as long as you fulfil the below requirements:

• You need to be in the age group of 18 to 65 years
• The shares must be in the name of you, the individual. Lenders do not consider shares in the name of HUFs, corporations, and minors.
• You must have valid identity proof, address proof, income proof, and DP statement.
• You should not be a Director or Promotor of a company whose shares you wish to pledge.

Photo by Jason Briscoe

What precautions should you take when availing of Loan Against Shares?

Many investors borrow money against their shares only to invest it further into the equity market. However, this practice could prove risky (result in losses), particularly when the markets witness a sharp fall or are in a bearish trend.

Loan Against Shares, ideally, should be availed when you are in a financial emergency or you require funds for your child’s education expenses, wedding expenses, planned medical expenses, for business or professional purposes, etc.

Furthermore, the Loan Against Shares should be availed for a short duration of a few months. Extending the loan for a long period of time would mean paying more sum as interest, thus creating a financial burden on you. Hence, when you avail of such a loan, ensure you do not keep a very long loan repayment period.

Is now a good time to avail of Loan Against Shares?

Given that the Indian equity markets having sprinted to a new historic high (more than doubled in a matter of 18 months since the March 2020 low), the value of your equity shares may have also strengthened. It would be an opportune time to avail of a Loan Against Shares if you are in urgent need of money.

Currently, a variety of factors are powering the bull market, such as several measures taken by the government to reinvigorate economic growth, encouraging corporate earnings, improvement in the pace of inoculations in the country, receding new cases of COVID-19 in the country, trade talks about pushing investments into India, etc. Since the lenders offer approximately half of the value of the pledged shares as a loan and assess the pledged shares every week, it makes sense to borrow when the bull market is intact.

That said, make sure you do your research, compare the interest rates, margins, and other charges of different banks and NBFCs, read the terms and conditions carefully, and choose the lender that offers the best deal.

What is the process to avail of Loan Against Shares?

The application process for Loan Against Shares differs from lender to lender. DhanLap powered by Ark Neo Finance helps you get a Loan Against Shares within 15 minutes, that too online from the comfort of your home, office, or wherever you are. The application process is quick and easy. Here are a few simple steps to follow:

1. Visit the official website www.dhanlap.com
2. Sign-up by verifying your mobile number and email address.
3. Share your personal details, such as name, age, address, contact details, details of identity and address proofs, etc.
4. Read the list of shares accepted as collateral.
5. Select the shares from your Demat account which you wish to pledge.
6. Read all the Terms and Conditions and pledge the shares digitally.
7. You will receive a ready-to-use loan amount within a few minutes.

To Conclude:

Availing of a Loan Against Shares is a great way to utilize your money invested in shares without liquidating them. It can be the best flexible liquidity option for you, provided the necessary financial discipline is followed to repay the loan within a short period of time. It is advisable to opt for a lower amount than what you are eligible for so that it does not prove to be a burden while repaying.

This article has been authored by PersonalFN — a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinions on investing.