You sometimes need to get money as fast as possible to cover a financial emergency. This is the time when you need to act smartly and cover expenses using your shares as collateral with your bank. This is known as a Loan Against Shares or Loan Against Demat Shares.
Read this blog to know more about this type of loan, as it covers all the important aspects of the loan.
What Do We Mean By Loan Against Demat Shares?
When you want to apply for a Loan Against Demat Shares, you are putting up your demat shares held electronically as collateral to secure the loan amount from the bank. The loan amount you are eligible for is determined by the value of the shares you use as collateral.
You can get a loan amount up to 50% of the market value of the approved scrips. The loan can be helpful for people who require quick access to money without having to liquidate their investments.
Highlights of a Loan Against Demat Shares
The following aspects make Loan Against Shares a good option for emergency fund needs:
- No Need to Sell Your Shares
The first important benefit of this loan type is that there is no need to sell the shares present in the demat account. It means you can continue to enjoy the ownership and potential long-term gains.
- Quick and Easy Access to Funds
Loan Against Demat Shares gives you the ease to get the money quickly and easily with a very simple application process. Once your documents are verified and shares are pledged, the funds are disbursed promptly from the bank.
- Overdraft Facility
You get the loan as an overdraft and pay the interest only on the amount used for the tenure. This way, you can effectively use the money for expenses and save money along the way.
- Dividends and Corporate Benefits Remain Yours
Even though your shares are pledged, you continue to receive dividends, bonuses, and rights issues, just like before. This type of loan is ideal for emergencies, business needs, or short-term financial goals.
Eligibility for Loan Against Shares
Before you apply, make sure you meet the following criteria:
- Age Limit: You must be between 18 and 75 years of age.
- Contact Information: A working email ID and mobile number are required for communication and account alerts.
- Shares in Demat Form: The shares must be held in Demat (dematerialised) format.
- Eligible Applicants: Only individuals can apply. Single proprietors, partnerships, corporations, and HUFs are not eligible.
- Approved Scrips: The loan will be given only against authorised scrips. Not all stocks are accepted; check the bank’s approved list first.
Documents Required for Loan Against Shares
When applying for the loan, keep the following documents ready:
For Individuals:
- Identity Proof: Aadhaar Card, Voter ID, or Passport
- Address Proof: Utility bill, Passport, or recent Bank Statement
- Proof of Signature: Cancelled cheque or Bank Passbook with signature
Essential Things to Know When Taking a Loan Using Your Demat Shares
The following things are important to keep in mind before applying for this loan:
- Know About Loan-to-Value (LTV) Ratio
The loan-to-value (LTV) ratio indicates how much you can borrow based on the value of your pledged shares, up to 50% of the market value of the approved scripts. Keep in mind that if your share’s value decreases then the bank might require collateral or a partial repayment to uphold the LTV ratio.
- Check Interest Rates and Fees
When borrowing against demat shares, it’s wise to compare interest rates and keep an eye out for additional charges like processing fees or foreclosure penalties that could increase the total borrowing cost.
- Check The Needed Eligibility Criteria
Before submitting your loan application, be sure you satisfy all the eligibility listed by the bank. Always remember that the only shares that can be pledged are those that the bank has approved.
- Analyse Various Market Risks
Shares may change in value depending on market conditions. If there’s a drop in market value then the bank may ask for extra shares as security or adjust the repayment terms.
- Choose a Reputable Bank
It’s important to remember that different banks have different loan features. Choose a bank that provides the finest terms and conditions, low rates, and first-rate customer service by doing your homework.
Conclusion
A Loan Against Demat Shares is a smart financial tool if you need funds without disturbing your stock portfolio. It offers quick access to money, lower interest rates, and flexible repayment options. Just make sure you understand the eligibility and repayment terms.
Always borrow responsibly and ensure that you can repay the amount on time to avoid affecting your credit score or risking your pledged shares.
