What is Loan Against Shares ?

Say you have invested in a good company's shares over the years, and you do not want to sell them because the prospect for that share price seems bright. Now suddenly you need money for a business expense, education, or a short-term emergency. You may sell those shares and get the required money, but you don't want to do so. This is where a loan against shares becomes the go-to path.

A loan against shares is a secured loan in which you pledge your equity shares or other eligible securities, like mutual funds, to a bank or financial institution and borrow money against their value. You continue to own the shares; they stay invested, but the lender keeps them as security until the loan is repaid.

It must be noted that not all shares are eligible for pledging. Each lender, based on certain criteria, has its own list of eligible shares for pledging as securities. So, when you apply for a loan against shares, the lender first checks if the shares are eligible for pledging. If yes, then they check the market value and quality of your shares.

Based on this value, a certain percentage is offered as a loan. This percentage is known as the Loan-to-Value (LTV) ratio and usually ranges between 40% and 60%, depending on the shares and market conditions.

Once this is done, the shares are pledged digitally through your Demat account, not physically handed over. Once the pledge is confirmed, the loan amount is credited to your bank account. As long as you repay the loan and interest on time, your shares remain untouched.

Banks and NBFCs generally accept listed and actively traded shares of well-known companies. Large-cap stocks are preferred because they are less volatile. Some lenders also allow loans against mutual fund units and exchange-traded funds (ETFs), subject to internal policies.

Yes, a CIBIL score is required, but it is not the main deciding factor. Since this is a secured loan, lenders focus more on the value and quality of the shares pledged. However, a very low CIBIL score or a history of loan defaults can lead to rejection or higher interest rates. A decent credit score helps in getting better loan terms and faster approval.

Interest rates on loans against shares are usually lower than personal loans because the loan is backed by collateral. You may get flexible repayment options, such as paying only interest regularly and repaying the principal later. Some lenders also offer overdraft-style facilities where interest is charged only on the amount used.

The biggest risk in a loan against shares comes from market fluctuations. If share prices fall sharply, the lender may ask you to add more shares or repay part of the loan. This is known as a margin call. If the borrower fails to respond, the lender has the right to sell the pledged shares to recover the loan amount.

A loan against shares is a financing option for investors who need funds without selling their investments. It offers lower interest rates than unsecured loans and flexibility. However, since share prices can rise and fall, it should be used carefully and for short- to medium-term needs.