Loan against shares (LAS) is one of the types of loans that is gaining popularity in India these days. As the name suggests, the loan is granted against the shares held by the borrower. The loan amount is determined by the market value of the pledged shares. In this article, we will discuss five things you should know about a loan against shares.
1. Eligibility Criteria:
To avail of a loan against shares, a borrower should be a shareholder with a demat account holding shares in his or her name. There is no strict requirement regarding the minimum number of shares that a borrower should hold, and it varies from lender to lender. Most banks and financial institutions grant LAS up to 50% of the total market value of the shares pledged. The market value of the shares is assessed by the lender before the loan is sanctioned.
2. Interest rates:
The loan against shares interest rate is usually lower than that of a personal loan as the security for the loan is the pledged shares. The interest rate charged by the lender may vary depending upon the type of shares pledged and the creditworthiness of the borrower. Banks and financial institutions offer different interest rate structures based on the shares pledged. You can also opt for a fixed or floating interest rate on your loan.
3. Tenure:
The tenure of a loan against shares varies from lender to lender. The minimum and maximum tenure of a LAS can range from one year to ten years. The borrower should choose the tenure of the loan keeping in mind the repayment capacity and financial obligations. The tenure of the loan can be extended or reduced based on the borrower’s request and the lender’s approval.
4. Repayment:
The repayment of a loan against shares can be done through EMI (Equated Monthly Instalments) or through interest-only payments. The borrower can select the mode of payment based on his or her financial capacity. An EMI involves repayment of both the principal and the interest, whereas interest-only payments require the borrower to pay only the interest levied on the loan amount, and the principal amount can be repaid at the end of the tenure.
5. Risk:
A loan against shares is a secured loan, and the shares pledged act as collateral for the loan amount. However, there is a certain degree of risk involved in this type of loan. If the market value of the pledged shares falls below the loan amount, the lender may ask the borrower to either pledge more shares or repay the loan amount to cover the shortfall. The borrower should, therefore, be aware of the risk involved in pledging shares as collateral and should always opt for the least amount of loan required.
Conclusion
A loan against shares is a convenient and hassle-free way to obtain funds in times of financial need. It is important to select the right lender and choose the loan amount and tenure carefully. The borrower should also have a clear repayment plan in place to avoid any default. It is advisable to read the terms and conditions of the loan agreement carefully and seek professional advice before availing of a loan against shares.
