What is Loan Against Shares?

What is Loan Against Shares?

You might be able to get a loan against shares that you own in a Demat account if you have shares or other securities there. This is referred to as a Loan Against Securities (LAS) or a Loan Against Demat Shares (LADS). The maximum loan against Demat shares might change based on the lending institution, the value and kind of shares, and the borrower's creditworthiness, among other things.

A loan against Demat shares is a practical solution that may help you obtain a loan and maximise your share market assets if you need to borrow money but do not want to risk your genuine possessions.

What is the Process for a Loan Against Demat Shares?

A loan against your Demat shares is a kind of borrowing where you use your Demat shares as collateral. Using a loan against Demat shares, you can recover the money without selling your assets in order to earn revenue. No further assets or securities are required for a loan against Demat shares other than the shares already present in your Demat account. You can explore loan against Demat account holdings in the following article.

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Table of Content

  1. What is the Process for a Loan Against Demat Shares?
  2. The following factors make a loan secured by Demat Shares a prime borrowing choice:
  3. What Characteristics Exist In Loans Secured By Demat Shares?
  4. What Should You Avoid When Obtaining a Loan Against Demat Shares
  5. Benefits of Loan Against Shares
  6. Things to keep in mind before availing a Loan Against Demat Shares

The following factors make a loan secured by Demat Shares a prime borrowing choice:

1. Applying to the same financial institution is preferable

The same banking institution that you use for your Demat account service is where you may get a loan. The disbursal of your loan against Demat shares is smooth if you obtain it from the same financial institution that manages your Demat account. Since the financial organisation offers your shares as collateral for the money it receives, you are essentially borrowing the money from it.

Open a Demat account with a reputable financial institution that offers simple loans against assets if you want to secure this simplicity of payment.

2. Advantage of loan against Demat shares

Your shares are effectively held as collateral when you apply for a loan against Demat shares. You continue to benefit from your share investments even while your Demat shares are pledged as security for the loan, often managed through a share trading app. In order to do this, you must obtain and maintain not just the dividends but also any bonuses and rights that are owed to you.

3. Requirements for obtaining a loan against Demat shares

Be sure you qualify for the loan procedure before obtaining a loan against the shares in your Demat account. Here are the prerequisites:
 

  • You must fall within the age range of 18 and 65.
  • Only shares held in a person's name are eligible for pledging. Pledges of shares made in the names of corporations, HUFs, NRIs, or minors are not permitted.
  • Additional requirements include submitting a few crucial papers. These consist of an acknowledgment from your DP, identification proof, address proof, income proof, and income proof.

You cannot pledge shares of a corporation when you are a Director or Promoter.

What Characteristics Exist In Loans Secured By Demat Shares?

There are a number of elements that set apart the loan you obtain against the shares in your Demat account from other types of loans. The following are some of the most crucial characteristics you need to be aware of:

  • You can use your Demat shares as collateral to obtain a loan for up to Rs. 20 lakhs.
  • Loans against Demat shares typically have interest rates between 12 and 18 percent per year, making them less expensive than personal loans.
  • Guarantors are not necessary for loans secured by Demat shares. Additionally, they often do not levy advance fees.
  • Every week, the value of the pledged shares is determined.

What Should You Avoid When Obtaining a Loan Against Demat Shares

Even while taking out a loan against the shares in your Demat account is a smart move, it's still important to spend this money cautiously and prudently.

Some stockholders exclusively use loans secured by their Demat shares to reinvest their proceeds back into the market. However, if the market enters a bearish trend, this move might cause significant losses because you still have to pay the financial institution's interest. 

Benefits of Loan Against Shares

Loans against shares offer the following benefits:

  • Loans against shares are a better option than other credit options. 
  • Compared to other types of loans, such as personal loans or credit cards, loans against shares have lower interest rates. Lenders view collateral as a relatively safe investment, resulting in lower interest rates. 
  • The loan against shares is also usually processed faster than other forms of credit, making it a fast source of funds.
  • If you have shares as collateral, you can use them for your personal and financial needs. 
  • As compared to other forms of unsecured loans, loans against shares can provide you with a higher loan amount.

Things to keep in mind before availing a Loan Against Demat Shares

The following things should be taken into consideration before applying for a loan against shares:

  • It is one of the most cost-efficient ways to obtain cash by borrowing against your Demat shares. However, as a borrower, you need to inquire about financial institutions. A good financial institution is key to maximising your benefits.
  • In order to apply for a loan against Demat shares, you can choose between two types of financial institutions - banks and stockbrokers. 
  • If you maintain a Demat account with the same institution, it is always a good idea to apply there. Due to the fact that your financial institution already owns your shares, they can use the shares as security to give you the funds you need for your loan.

Conclusion

You may take advantage of the borrowing advantages of your share market assets by applying for a loan against your Demat shares. The goal is to choose the finest financial institution that can provide you with a superb Demat account and the ability to borrow money against your Demat shares. It is advised to speak with banks, financial institutions, or lenders before taking a loan against a Demat account. Get accurate and current information on the maximum loan against Demat shares.

FAQs on Loan Against Demat Shares

Your ability to access cash without having to sell your shares is the primary benefit of taking out a loan against demat shares. 

It's a smart idea to take out a loan against your equity investment if you have long-term stock investments. These loans allow investors to satisfy deficit fund requirements while maintaining sufficient wealth to achieve long-term financial objectives.

Depending on the loan institution, certain shares may or may not be eligible or acceptable. In general, it is more probable that highly liquid shares listed on reputable stock exchanges would be accepted as collateral.

Yes, taking out a loan against demat shares carries some risk. The lending institution may sell the pledged shares to recoup the unpaid balance if you don't repay the loan in accordance with the terms you agreed to.

Generally speaking, you can prepay the loan before the predetermined term.