With traditional bank loans and overdraft facilities getting expensive, financial institutions have come up with new ways to facilitate meeting intermediate cash flow requirements of consumers.
In India, there has long been a tradition of money lenders hypothecating gold jewellery & ornaments in return for cash to meet personal exigencies or other business opportunities. Now, not just gold but equity shares of companies that you have invested in, can be used to borrow money for the short term to meet these requirements.
What are loans against shares?
Loans against shares offer opportunities to monetise investments in listed shares or mutual fund units or other securities to raise capital for business and financing needs. No additional security or collateral, except for the shares are required to be pledged. The value of the loan can range anywhere between 50- 90% of the value of the pledged security.
Many institutions offer quick processing and attractive interest rates to the borrowers for this facility. Interest rates, while differing from one institution to another, are generally lower than that of a credit card or a personal loan since they are secured by a collateral which is the security pledged.
Easy, faster processing:
Most institutions also offer a simplified process for availing this short term loan facility which is sometimes processed even faster than a normal EMI-based loan by some of the larger banks and financial institutions.
The borrower is also offered flexibility to time the withdrawals and repayments comfortably, with several banks also offering ATM and internet banking facilities to conduct such transactions.
Points to keep in mind:
There are however, certain points to be kept in mind when availing loans against shares, despite their advantages:
- These loans have charges such as processing fees, one-time fee, renewal charges, among others which need to be considered carefully before availing of the loan
- If the value of the pledged shares goes down, the borrower is required to make up the difference/shortfall by either paying in cash or pledging more shares. If the borrower is unable to meet the shortfall, the lending institution can sell the shares to recover the loan amount.
- Loans against shares work well as a financing avenue when the markets are moving up. In a downward market cycle, these are not the best funding tool
Thus, for borrowers having a sufficient repayment capacity and a short time span of funding requirement, loans against shares offer an attractive option. However, one must carefully consider their cash flow situation and market conditions before opting for loans against shares.