Key differences between loan against shares and traditional loans
Let’s simplify this with a comparison table:
Feature
|
Loan against shares
|
Traditional loans
|
Collateral
|
Listed shares or other securities
|
Depends (secured or unsecured)
|
Processing time
|
Quick often within 24–48 hours
|
3–7 business days or more
|
Ownership of investment
|
You retain ownership of shares
|
N/A
|
Loan-to-value (LTV)
|
Typically, 50% of share value
|
Not applicable
|
Interest rates
|
Generally lower due to secured nature
|
Higher (especially for personal loans)
|
Prepayment flexibility
|
Flexible, low to no charges
|
May involve foreclosure penalties
|
Usage of funds
|
No end-use restriction
|
Varies based on loan type
|
Credit score dependency
|
No impact on credit score
|
Heavy impact; credit score crucial
|
Need quick funds without selling your shares? A loan against securities gives you flexibility at lower costs. Apply now
Advantages and disadvantages of loan against shares and traditional loans
Understanding the strengths and limitations of each option helps you make a more informed borrowing decision. Here's a breakdown:
Loan against shares
Advantages:
Lower interest rates as the loan is backed by collateral
Quick disbursal, often within 24–48 hours
You retain ownership of your share market investments
Flexible repayment with minimal prepayment charges
Disadvantages:
Loan amount depends on market value of shares (LTV usually capped at 50%)
Market volatility can reduce eligible loan value
Limited to approved list of securities
Traditional loans
Advantages:
Available even without any investment or collateral
Ideal for long-term needs like home purchase or business expansion
Predictable EMIs and fixed repayment tenure
Disadvantages:
Higher interest rates, especially for unsecured loans
Longer processing time with stricter documentation
Prepayment or foreclosure charges may apply
Why more investors are choosing loans against shares?
If you have a solid equity portfolio, it does not make sense to disturb your long-term wealth creation plan. Here’s why a loan on shares is fast becoming the preferred choice:
- Quick and hassle-free
When urgency strikes say, a business opportunity or a family emergency you can’t afford to wait. A loan against share market investments can be disbursed within a day, often with minimal paperwork, especially if your shares are already in a Demat account.
- Retain your market position
With LAS, your shares continue to stay invested. If the market performs well, you benefit from capital appreciation and dividends while still accessing liquidity.
- Interest only on the amount used
Most LAS facilities are structured as overdrafts. This means you only pay interest on the amount withdrawn, not the entire sanction ideal for managing short-term working capital or recurring needs.
What are the risks and considerations?
While loan against securities has many upsides, there are a few things to watch for:
Market volatility: If share prices drop sharply, your LTV ratio can breach the permissible limit. In such cases, the lender may ask you to top-up collateral or repay part of the loan.
Pledged shares cannot be sold: You can’t trade pledged shares until the loan is repaid, or the lender allows re-pledging.
Scrip eligibility: Only approved shares from specific lists are eligible, so your entire portfolio may not qualify.
When should you consider a loan against shares?
A loan against shares is ideal if:
You need short-term funds but don’t want to break investments
You want lower interest than unsecured loans
You need a quick disbursal with less documentation
You have surplus shares lying idle in your Demat account
When is a traditional loan a better fit?
Traditional loans may be more appropriate if:
You don’t own significant shareholdings
You want a longer repayment tenure (5+ years)
You prefer EMI-based repayments over overdrafts
You don’t want to risk market-linked collateral
How is interest calculated on a loan against shares?
Interest on a loan against shares (LAS) is typically calculated on a daily reducing balance, which means you're charged interest only on the amount you've actually withdrawn—not on the entire sanctioned limit. This makes it significantly more cost-effective than traditional fixed-EMI loans, especially if you’re using the funds in stages or for short durations.
For instance, if you’re approved for Rs. 5 lakh but withdraw only Rs. 1.5 lakh, the interest will be calculated only on that Rs. 1.5 lakh until you withdraw more. This gives you the flexibility to manage cash flow more efficiently and avoid paying interest unnecessarily.
Bonus tip: Always keep track of your withdrawal dates and repayment timelines to optimise interest savings.
What securities can be pledged?
While shares are the most commonly pledged instruments due to their liquidity and easy valuation, lenders today accept a wider basket of market-linked assets and policies. This gives you flexibility in how you unlock capital from your portfolio.
Here are some of the securities typically accepted for pledging:
Equity shares (listed on approved exchanges)
Mutual funds (both debt and equity-oriented)
Bonds and debentures (listed and rated)
Exchange Traded Funds (ETFs)
Insurance policies (ULIPs, traditional endowment plans)
Among these, shares are still the fastest to process and most widely accepted due to their transparent pricing and higher liquidity.
With a wide range of accepted securities, you have the freedom to choose what works best for your financial needs. Apply for loan against securities now
What happens if share value falls?
Loans against shares are subject to Loan-to-Value (LTV) ratios, which define the maximum loan you can get against the market value of your pledged securities. But markets fluctuate—so what happens when your shares lose value?
This is where the margin maintenance clause comes into play. If your shares drop in value and the LTV breaches the allowable limit (say it exceeds 65%), the lender may issue a margin call. This means you will be required to either:
If neither is done, the lender has the right to sell off a portion of your pledged shares to recover the margin shortfall.
What makes a loan against shares ideal for business owners?
If you are a business owner or self-employed professional, you likely experience seasonal cash flow gaps. Instead of applying for a new business loan each time, a revolving credit line via LAS can serve as your on-demand liquidity pool.
Example: Ramesh, a Mumbai-based trader, pledged shares worth Rs. 30 lakhs to raise Rs. 18 lakhs during peak season. He repaid Rs. 10 lakh in two months and reused the limit again during Diwali orders all without reapplying.
Conclusion
Whether you are planning to expand your business, manage medical expenses, or grab an investment opportunity, a loan on shares offers unmatched speed, flexibility, and control over your wealth. Traditional loans still have their place but for savvy investors who want liquidity without sacrificing returns, loan against share market investments is the clear winner.
Ready to access the value of your portfolio? Apply for a loan against shares today
