You could be wrong if you thought borrowing money in India was possible only via a personal loan. If you’ve invested in any assets, you can also pledge those with a financial institution (if they’re eligible) and borrow funds in return. Equity stocks are among the various investments that may qualify for such secured credit facilities. By pledging eligible stocks, you can avail of a loan against shares and manage financial contingencies easily.
In this blog, let’s discover what loans against shares are, how they work, and the benefits and application process.
Loans against shares are secured borrowings that many leading banks and financial institutions offer. These loans are disbursed to borrowers who offer eligible equity investments as collateral to the lender. Since equity stocks are volatile investments, the criteria to determine which stocks qualify as collateral can be quite stringent.
If the shares you invested in qualify, you can obtain a loan against those stocks. When you pledge the shares as collateral, the lender obtains a lien on those investments during the repayment tenure. If you default on your loan repayment, the lender has the right to redeem your investments and benefit from the sale proceeds instead.
By choosing to avail of a loan against shares to meet your emergency financial requirements, you also stand to gain in many other ways. The top benefits of this credit facility include the following:
The exact process to apply for a loan against stocks may vary from one lender to another. However, the steps typically involved in the process are as follows.
In case your portfolio does not include eligible equity shares, you will not be able to obtain a loan against shares. However, before you hastily sell your investments to obtain liquid funds, consider the following alternatives.
Like loans against shares, gold loans are also secured loans. If you own gold in the form of bullion or jewellery, you can pledge those assets to borrow money via a gold loan.
Instant loans are pre-approved credit facilities that banks may offer individuals with high credit scores. These loans are disbursed almost instantly since you don’t need to apply for them.
Some banks offer overdraft facilities against fixed deposits. If you have an FD with the bank, you can check your eligibility and apply for this facility if you qualify.
You can obtain a loan against your life insurance policy too. This loan is typically offered by insurance providers themselves.
To sum it up, if you require funds to meet a financial emergency and if you have invested in equity shares, a loan against shares may be a suitable option to consider. Before you apply, ensure that you have the financial capacity to repay the loan. Otherwise, your shares will be sold by the lender to compensate for the unpaid loan balance, if any.
Investing in eligible Indian stocks may make it easier to obtain a loan against shares. However, it’s also crucial to diversify your portfolio to include international stocks. Fi enables you to invest in top US companies — at industry-best forex rates. So you can own shares in Apple, Tesla, Microsoft, and so on! With an intuitive user interface, Fi simplifies the world of US Stocks alongside their FINRA-regulated broker partner, Alpaca Securities. Besides in-app explainers, novice investors can use Curated Collections (like All-Time Favourites) to make decisions.
A loan against shares is a credit facility where you pledge shares to borrow money. The shares act as collateral for the loan.
Yes, some risks associated with loans against shares include share price volatility, potential margin calls and the risk of losing your shares if you fail to repay the loan.
The advantages of using shares as collateral for a loan include easy liquidity without the need for selling the asset and potentially competitive loan interest rates.
To calculate the loan-to-value ratio when you avail of a loan against stocks, divide the amount of the loan by the market value of the shares pledged.
If you fail to repay the loan against your shares, the lender will typically sell the shares pledged and utilise the sale proceeds to compensate for the default.