Pros & Cons Of Taking Loan Against Shares

Explore the advantages and disadvantages of taking a loan against shares. Discover the benefits and potential drawbacks of leveraging your investments for financial assistance.
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3 mins read
09-May-2025

What is a loan against shares or stocks?

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
Loan Against Shares
Loan Against Mutual Funds

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.

Key considerations before applying

Before opting for a loan against shares, it's important to understand the fine print and assess your financial stability. This type of loan can be a smart liquidity tool—but only when used with caution.

  • Check eligible shares: Only select shares approved by the lender will qualify as collateral.

  • Understand margin requirements: Lenders typically offer 50% of the share value as loan—this may vary.

  • Be prepared for volatility: A drop in share value can trigger margin calls.

  • Read the loan terms carefully: Ensure you are aware of interest rates, tenure, and repayment clauses.

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.

Frequently asked questions

Is it good to take a loan against shares?
Taking a loan against shares can be beneficial if you need quick liquidity while retaining your investments. However, it comes with risks like market volatility and the of losing your shares if the loan isn’t repaid.

Can you secure a loan against shares?
Yes, you can secure a loan against shares by pledging them as collateral. The loan amount is typically a percentage of the share value, allowing you to access funds while retaining ownership of your stocks.

How much loan can I get against my shares?

You can typically get up to 50% of the market value of your shares as a loan, depending on the lender’s policy and share type. The final sanctioned amount also considers daily stock price fluctuations and risk parameters.

Which shares are eligible for loan against shares?

Only listed shares approved by the lender are eligible. These usually include actively traded, high-market-cap stocks from reputed companies. Illiquid or penny stocks are generally excluded due to their higher risk and lower collateral value.

What happens if the share price falls after taking the loan?

If the share value drops significantly, the lender may issue a margin call asking you to provide additional collateral or repay part of the loan. If unmet, they may sell pledged shares to recover the loan amount.

Is there any tax implication of taking a loan against shares?

No, taking a loan against shares does not attract any direct tax since you are not selling your holdings. However, interest paid on the loan is not tax-deductible for personal purposes, unlike certain business-related borrowings.

What is the interest rate on loan against shares?

Interest rates for loans against shares typically range between 8% to 15% per annum, depending on the lender, your credit profile, and the type of shares pledged. Rates are generally lower than unsecured credit due to the secured nature of the loan.

What are the risks of taking a loan against shares?

Taking a loan against shares carries risks like market volatility, where falling share prices can trigger margin calls. There's also the risk of losing your pledged shares if you default, along with interest costs and temporary loss of voting rights.

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