Pros & Cons Of Taking Loan Against Shares

Introduction

A loan against shares is a form of secured loan where individuals pledge their shares as collateral to obtain funds. This allows borrowers to leverage their stock portfolio for liquidity without having to sell their investments. The loan amount is usually determined based on the value of the pledged shares, making it an attractive option for those who need funds while continuing to hold their stock investments.

Pros of loan against shares

• Quick liquidity: Borrowers can access funds without selling their shares, providing cash flow.

• Retain ownership: You continue to own your shares and benefit from dividends or capital appreciation during the loan tenure.

• Lower interest rates: Since it is a secured loan, the interest rates are typically lower compared to unsecured loans.

• Flexible loan amount: The loan amount is based on the market value of the pledged shares

Cons of loan against shares

• Market risk: If the stock value falls significantly, the lender may ask for additional collateral or force the sale of shares to recover the loan.(depends on the terms agreed between borrower and lender while taking the loan)

• Interest cost: While interest rates are lower than unsecured loans, borrowers still incur interest costs, which can add up over time(depends on the terms agreed between borrower and lender while taking the loan.)

• Limited borrowing potential: The loan amount is generally limited to a percentage of the market value of the shares, (50% of asset value as per RBI guidelines) reducing the available loan amount if share prices drop

• Risk of losing assets: Failure to repay the loan may result in the lender selling your pledged shares, leading to a loss of ownership.

• Losing control of shares: One major risk is losing control over your shares temporarily, potential loss of voting rights, and the risk of the borrower defaulting. Make sure to read these terms carefully before making a decision.

Conclusion

A loan against shares offers a convenient way to raise funds without selling off investments, providing benefits like continued ownership and lower interest rates. However, it comes with market risks and the possibility of losing pledged shares if the loan is not repaid. Borrowers should carefully weigh the pros and cons and assess their ability to manage the loan before opting for this option.Top of Form

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