Loan Against Shares: Life’s uncertainties might cause unexpected job loss or the sudden advent of a medical emergency, leaving people with little choice but to liquidate their investments. To liquidate long-term investments for a short-term cash emergency is never a prudent financial move, especially when there are tools like loans against shares available.
What is Loan Against Securities?
Capital market investors can borrow money against their shares without having to sell them thanks to the loan against shares, a cutting-edge financial product made available by both banks and NBFCs. Loans against securities are often made for a brief period of time and in a small amount. Loans secured by securities are secured loans in which the securities serve as the security. These loans can be utilised for a range of purposes, including holidays, travel, unexpected medical expenses, education, etc.
How can investors use this tool to increase their financial fortune?
Lets understand this with an example. Risha is a local entrepreneur who owns a reputable bakery chain in the area. She sees a chance to extend her company by setting up another location in a busy district because of the demand and her expanding customer base. The issue is that she has amassed an impressive portfolio of shares by investing a large portion of her wealth in equities. She must decide whether to sell her investments or postpone the opening of a new store. When Risha considers the possibility of obtaining a loan against a sizeable percentage of the value of her shares, she discovers a compromise. It was a win-win situation for her because she was able to keep her assets, pursue her desire of expansion, and benefit financially as a result of the business expansion. Similar to Risha, investors have two benefits from loans against shares: rapid cash via swift loan disbursement and preservation of ownership of the investments.
Options for Loan Against Shares
You have two choices when taking out a loan against shares: overdraft and demand.
- Investors can borrow money through the overdraft facility against the pledged shares up to a predetermined limit specified by the lender.
- The interest is determined by the loan amount and term, but the maximum is periodically adjusted to reflect the shares’ current market value.
Things to Keep in Mind While Taking a Loan
A loan against securities enables borrowers to use certain equities as collateral, although not all stocks are accepted. According to RBI regulations, you can only pledge assets that fit under the Group 1 category, which comprises stocks with a low cost impact of trades and those have been traded regularly (at least 80% of the days) over the previous six months. Due to their liquidity and diversification, the particular group of stocks has been chosen as collateral in order to guarantee their dependability and safety. It guarantees market stability and fewer turbulences.