Shares of the stock market can get you a loan as well but before applying, here are the things you need to know.
Loans can be a great way to finance your needs and desires. Banks and NBFCs now offer loans to help buy almost everything from electronic appliances to a shining new vehicle. The process of loans is quite simple – you apply for it, the lenders check for your credibility, and if all goes well, the amount will be sanctioned in your account soon. This process is similar for almost every loan except when it comes to a big amount. Loans like home loans and mortgage loans follow the same process, but to get approved, they require collateral.
Financial institutions are not just limited to lending loans to applicants who are looking forward to make purchases; they also offer loans to the people who are in need of emergency funds. Banks offer small amount loans like credit card loans, personal loans and minor debt consolidation loans to the applicants without collateral. While loans with huge amounts need security, nowadays, banks have extended their scope of collaterals to share market investments as well.
Loan against shares is great way to get financial aid without losing your financial assets. If you are looking forward to apply for the same, here are some pointers which might help understand the pros and cons of loan against shares.
- Lower interest rates: People who have been looking for a loan in recent times might have come across this word quite often. Interest rates play a vital role in any loan. It is basically a sum which the lender charges you for the loan on a yearly basis. The interest rates of unsecured and secured loans have a vast difference. Due to the pledged collaterals, secured loans tend to have lower interest rates in comparison to other lending products.
- No specific purpose: The loans which are offered to the applicants can be used for any purpose by them. Just like personal loans, the lenders do not ask you the purpose of the loan for approval. This means you can use the amount to purchase a house or to settle an old debt or finance a medical emergency.
- No Pre-payment charges: Most of the lenders that offer loan against shares keep the minimum tenure for one year, which can be extended by paying a particular amount. Since the tenure is already low, the lenders do not charge the applicants for pre-payment.
- Loan to value: This can be a major disappointment for first time applicants. When you apply for a loan against share, the lender valuates the amount of shares you have pledged, and offers you the loan. However, the amount sanctioned in your account might be lower than the stock valuation, as lenders offer only 60-80 per cent of value of the collateral.
- List of companies: While evaluating the applicant’s database, the lenders often pay close attention to the name of the company whose stocks are being pledged. If the company does not belong to the lenders list, the loan application will be rejected. Hence, it is essential that you check the list before applying.
- Selling of stocks: Once the loan has been approved, you lose the authority over your shares partially. This means that if you find an opportune moment to sell the shares for profit, the loan will limit you from doing so. You will gain full authority of the stocks, after you repaid the loan.
To understand equity and other investments better or to know more about loan against shares, you can contact our team of experts.