Loans are a way to raise funds in the time of need. But getting a loan isn’t always easy. Sometimes, it takes a long time to raise funds in the time of need, with lengthy compliances and requirements. One avenue to raise quick funds is personal loans. But loan against shares is more convenient and reliable option to raise funds.
Loan against securities or loan against shares means specified securities are pledged to the lender. Lenders usually specify shares against which loans are given out. Based on the company’s performance and the share price trends, lenders select high performing and stable companies for such loans. The Loan to Value ratio is around 50-60% which means 50-60% of the value of the shares in the market is given as a loan.
Here are 7 advantages of loans against shares:
1. Provides instant liquidity:
Some lenders provide loan against shares with instant approval. After approval, it does not take long for funds to get credited to the borrower’s account. Since the lender selects shares from stable companies, the loan amount is guaranteed. This instant liquidity can be used to meet urgent fund needs.
2. Freedom to use funds:
Like a personal loan, a loan against securities does not dictate the purpose or end use of funds. The borrower can use the funds for business or personal expenses.
3. High loan limits:
The minimum amount for loan against shares is Rs. 1 lakh and the maximum amount that lenders give out is Rs. 20 lakhs. Thus, by pledging shares, a higher value of loan can be easily obtained.
4. Interest only on funds used:
The loan amount is credited to an account and interest is only charged on the funds withdrawn. The period of interest depends on the period for which the funds are used. This means if the drawn funds are less than the disbursed funds, interest won’t be charged on the funds that haven’t been drawn.
5. Borrower retains ownership:
Even though the shares are pledged to the bank, the borrower retains ownership. So dividends on shares, bonus offers accrue to the credit of the borrower.
6. Less rate of interest as compared to personal loan:
There is no collateral in case of a personal loan. That’s why the interest amount is high to cover the risk. But in case of loan against shares, the lender is assured of a return in case of default. This reduces the interest rate on such loans.
7. Instant approvals:
The approval process for loan against shares is short. It is easy to evaluate the quality of the borrower’s portfolio and select the shares against which to lend. The typical approval process hardly takes time.