A loan against shares is a financial product where investors pledge their shares as collateral to obtain funds from lenders. Unlike other types of loans, it does not require any end-use justification, and the borrower is free to use the funds for any purpose. In this article, we will explore how a loan against shares works and the key features that borrowers should be aware of.
What is a loan against shares?
A loan against shares is a type of loan where investors borrow money from a lender by pledging their shares as collateral. The lender values the shares and offers a loan amount that is a percentage of their current market value. The investor can use the loan amount for any purpose, such as meeting personal or business expenses.
How does a loan against shares work?
- Pledging shares:
The first step is to pledge high-quality shares to the lender. The shares' value determines the loan amount that the borrower will receive. - Valuation of shares:
After the shares' valuation, the lender offers the borrower a loan amount based on the current market value of the shares. With Bajaj Finance Limited, you can get a loan of up to 50% of your shares’ value. - Interest rates:
The loan against shares interest rates are typically lower than other forms of unsecured loans.
- Margin calls:
In case the stocks pledged as collateral fall below the stipulated limit, the lender may demand additional collateral. Borrowers must keep track of the pledged stocks' value to avoid margin calls. - Loan disbursement:
Once the loan application is approved, the loan amount is disbursed into the borrower's account.
In conclusion, a loan against shares can be a useful financial tool for investors who need quick access to funds. It allows investors to utilise their investments in the stock market to secure a loan without selling their shares. However, borrowers must be cautious about collateral value fluctuations, repayment risks, and the risk of stock liquidation. It is advisable to borrow only what you need and to keep track of the resigned pledged shares' value.
