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Many decide to liquidate their financial assets whenever they need quick funds for a big-ticket expense. Selling these securities in distress often leads to economic loss, and investing efforts go wasted over the years. Therefore, those in a financial crunch may consider taking a loan on shares in India instead of selling them for cash. A loan against shares allows asset owners to borrow capital against their financial investments.
Like conventional securities like gold, insurance policies, vehicle, and property, people can now use their mutual funds or share investments to secure a loan. It works like an overdraft facility that one may avail of by pledging bonds, mutual funds, shares, and ETFs. The process is 100% safe and instant, and the borrower does not need to worry about prepayment or foreclosure charges. Here’s everything one needs to know before obtaining a loan on Demat shares in India. Read this to know the overall process for availing of this loan.
Who is Eligible to Take a Loan Against Shares?
A person is eligible to take a loan against Demat shares if they are:
- An Indian resident or NRI who holds shares in the Indian financial market
- A sole proprietorship owner with shares in the Indian share market
- A private or public limited company having investments in securities
- A private trust that manages property for a private or religious purpose under the Indian Trusts Act, 1882 and holds securities in the Indian financial market
Purposes to Take a Loan Against Shares
An individual or business owner may obtain a loan against securities for any of the following purposes:
- To fund everyday working capital requirements of a business and make way for future growth
- To expand a business, open a new branch, launch a new product line, or enter a new target market
- To increase wealth by investing more in the capital market
- To cover any personal expense, like a wedding, medical emergency, home purchase, or education
Determining the Asset to Pledge
Getting a loan against shares is all about choosing good enough assets to be pledged as collateral. Features of a good asset are:
- Dematerialized Assets: These securities are often easier to transfer, liquidate, and store.
- Easy to Transfer: The asset’s transfer process should not involve any complications.
- Easy to Market: An asset’s liquidity is directly proportionate to its acceptability.
- Stable Valuation: The asset must remain stable even during slight fluctuations. High volatility makes an investment riskier, and lenders may not accept them.
- No Disabilities: Disabilities in assets may complicate the loan process, particularly regarding bonds, certificates, and physical documents.
Critical Features to Know
- Loan Amount: Many reputed NBFCs offer high loan amounts against securities, depending on the collateral’s value. Many offer 60-70% of the asset’s value as a loan amount.
- List of Securities: Lenders offer loans against different investment instruments, including Demat shares, bonds, mutual funds, and ETFs. Checking the lender’s eligible securities list is crucial before applying for a loan on shares India.
- No Postdated Cheques or EMIs: Many NBFCs offer loans against securities in the form of an overdraft facility. Since the borrowers keep their security as collateral with the lender, the interest rates are lower and payable only for the amount and time borrowed.
- No Prepayment Charges: There is no need to worry about prepayment charges with a loan against securities. Since the loan works like an overdraft, the borrower is free to repay the borrowed amount anytime they want.
Steps to Apply Online
Many customer-centric NBFCs allow borrowers to apply for a loan on shares online in a hassle-free manner. Follow these steps:
- Visit the lender’s website
- Register under the ‘Loan Against Securities’ section
- Select the shares to be pledged
- Accept the agreement to engage the shares with NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited)
- Start using the borrowed funds almost instantly
A loan against securities comes with the added benefits of a part prepayment facility, instant loan approval, and interest charges only on the amount used. Those looking for immediate funds do not need to look for collateral other than the securities they already own. Taking a loan on shares is a quick and straightforward process with low-interest rates and instant loan approval. The benefits of this loan type are unparalleled and give borrowers the freedom to lead the way.
