5 Important Things to Consider while Taking Loan Against Demat Shares

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With so many different kinds of loans available these days, it may be tough to weigh the odds and make the right decision. While taking loans has undoubtedly become easier, there may not be enough information to make an informed choice. Just knowing about the market trends and relying on static sources of income may no longer be ideal. However, knowing the advantages and disadvantages of different kinds of loans may help distinguish between the appropriate and inappropriate loans depending on the circumstances.

Taking loans against Demat shares involves monetising investments in shares rather than selling them for capital. A loan against shares does not require any securities or collateral other than the shares present in the applicant’s Demat account. The entire process of choosing a loan and going through with it may be smoother with the knowledge of a few facts about these loans.

Where to take the loan from?

In order to make the process convenient, the loan can be availed from the same financial institutions where the Demat account is held. This makes the loan disbursal easier since the funds are just being borrowed from the financial institution. The shares are pledged as security against the funds that are received in this case. 

How does the loan work?

The bank grants a loan by marking a lien on the shares that it would hold in the Demat account. As a result, loans against shares interest rates tend to be lower than other loans like personal loans. Moreover, they do not require guarantors or have prepayment charges.

What are the advantages of this loan?

In other loans, entities like property may be held as collateral. In this case, shares become the collateral. Such a loan continues to offer advantages since the applicant still receives the benefits of the shares, such as dividends, rights, and due bonuses. The dividend is credited to the applicants’ account even if the shares are held as a lien. Once the loan is repaid, the lien is lifted.

Who can take this loan?

A loan against shares can be taken by those who fit the eligibility criteria, which includes points such as an age range of 18-65 years, shares in the name of the applicants only, the requirement of necessary documents such as address and identity proof, income-related documents, and so on. Moreover, an applicant cannot pledge the shares of a company if they are a director or promoter in the company.

Additional Read: Want to Invest? Find out If You Really Need to with These 6 Ways

What are the risks?

If applicants attempt to reinvest the money against which the loan was taken back into the market, any untoward trend can cause them to lose their profit. Therefore, there is a need to handle the shares responsibly and utilise the loan amount in case of financial emergencies or to meet specific goals, such as investments in capital.

Since loans against shares interest rates may vary, it is also essential to consider one’s current income situation and how the loan may affect financial security. The loan margin tends to be higher (even as high as 50%) since their value is bound to fluctuate.

The essential steps to take here are to be aware of the options, research different loans and their implications, borrow only from trusted financial institutions and evaluate one’s financial condition in the present to make the right decision for the future. Having a Demat account in the bank one wants to borrow from may be incredibly convenient. Depending on one’s need, a loan against shares may prove to be a beneficial step for one’s financial future. 



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Wednesday, 06th July 2022
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