When you need quick access to funds, selling your shares may seem like the obvious choice but it often means missing out on future gains. A loan against shares gives you a smarter alternative. By pledging your existing stock portfolio, you can unlock liquidity without losing ownership or dividends. Whether it’s for personal needs, business growth, or emergency expenses, this option ensures your investments continue to work for you. Let us explore how a loan against shares works, its benefits, risks, and management strategies.
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Definition of loan against shares
A loan against shares is a secured borrowing option where you pledge your shares or stocks as collateral to access funds. This way, you can unlock the value of your investments without selling them. It’s an efficient way to meet urgent needs while staying invested and enjoying future gains on your portfolio.
How does a loan against shares work?
The process is simple. You pledge your shares to a lender, who evaluates their market value. Based on this, you receive a loan amount, usually a fixed percentage of the total share value. Once approved, the money is disbursed to your bank account.
The best part? You still retain ownership of your shares and continue earning dividends. In return, you make regular interest payments on the borrowed amount until the loan is fully repaid.
Types of stocks approved for a loan against shares
Not every share qualifies for this facility. Typically, lenders accept:
- Blue-chip stocks: Established companies with consistent performance.
- Large-cap and mid-cap stocks: Companies with significant market presence.
- Exchange-traded funds (ETFs): Funds traded like shares on stock exchanges.
- Mutual fund units: Professionally managed, diversified investment vehicles.
These securities are considered relatively stable, giving lenders more confidence in the collateral.
Benefits of taking a loan against shares
There are many reasons why investors prefer this option:
- Quick liquidity: Get funds without selling your shares.
- Ownership retained: Stay invested and earn dividends.
- Lower interest rates: Cheaper than unsecured loans like personal loans.
- Flexible usage: Use the money for personal or business needs.
- Fast processing: With your portfolio as collateral, approvals are often quicker.
It’s a simple way to make your investments work harder without breaking your long-term strategy.
Risks to keep in mind
Like any financial product, a loan against shares carries some risks:
- Market volatility: Falling stock values can reduce your collateral’s worth.
- Margin calls: If share prices drop sharply, lenders may ask you to add more collateral or repay part of the loan.
- Collateral loss: Failure to repay can result in the lender selling your pledged shares, sometimes at a loss.
- Credit impact: Delayed payments can affect your credit score.
Being aware of these risks ensures you manage your loan wisely and avoid unpleasant surprises.
