Summary
This comprehensive guide explains how LAS operates, from eligibility and portfolio assessment to the disbursement of the loan and continuous monitoring. To make an informed decision, conduct thorough research and seek guidance from financial experts to align LAS with your unique financial goals and risk tolerance.
In today's fast-paced world, individuals and businesses often require quick access to funds for various purposes, such as expanding their business, funding a dream vacation, or even managing unexpected expenses. One way to leverage your assets to secure a loan is by opting for a Loan Against Shares (LAS). This financial instrument provides a viable solution for those who hold a substantial portfolio of shares or stocks. In this blog, we'll delve into how Loan Against Shares works and why it's a popular choice for many investors.
Understanding loan against shares (LAS)
A Loan Against Shares, as the name suggests, is a type of loan offered by financial institutions, where borrowers pledge their shares or stocks as collateral to secure the loan. This means that the shares you hold in your demat account can be used as security to access funds, without the need to liquidate your holdings.
How does it work?
Here's a step-by-step breakdown of how a Loan Against Shares typically works:
- Eligibility and portfolio assessment: To qualify for a LAS, you should first have a demat account with shares that are eligible for pledging. Financial institutions evaluate the quality of the shares and stocks in your portfolio. Typically, high-quality, highly liquid shares are preferred as they provide better security to the lender.
- Loan application: Once your portfolio is assessed and deemed eligible, you can apply for a loan against your shares with a financial institution. The lender will consider your loan application, which includes details like the amount you want to borrow, the interest rate, and the loan tenure.
- Valuation of shares: After your application is approved, the lender will determine the value of the shares you are pledging. This valuation is typically lower than the market price to account for potential market fluctuations.
- Margin requirement: The lender will also require you to maintain a certain margin, which is the difference between the market value of your shares and the loan amount. This margin acts as a cushion to protect the lender in case of market volatility.
- Loan disbursement: Once the valuation and margin requirements are met, the lender will disburse the loan amount to your bank account or through another suitable method. You can use these funds for any purpose, just like any other personal loan.
- Interest and repayment: Interest on the LAS is typically charged only on the amount you withdraw, and the repayment can be done in equated monthly installments (EMIs). The interest rate can vary depending on the lender and the market conditions.
- Continuous monitoring: As long as you have the loan, the lender will continuously monitor the value of the shares pledged as collateral. If the value falls below a certain threshold, the lender may ask you to pledge additional shares or repay a part of the loan to maintain the margin.
- Loan closure: Once you've repaid the loan in full, the shares pledged as collateral are released back to your demat account, and you regain full control over your assets.
Benefits of loan against shares
Now that we've covered the basics of how a Loan Against Shares works, let's explore the advantages of using this financial instrument:
- Liquidity without selling: The most significant benefit of LAS is that it allows you to access funds without selling your shares. This is particularly advantageous when you believe that the value of your holdings will appreciate in the future.
- Quick and easy approval: LAS typically offers faster approval and disbursement compared to other loans. This is because the lender already has collateral in the form of shares, reducing the risk.
- Competitive interest rates: Interest rates on LAS are often more competitive than those on unsecured personal loans since the lender has lower risk exposure due to the collateral.
- Flexible loan tenure: LAS offers flexibility in choosing the loan tenure, allowing you to align it with your financial goals and repayment capacity.
- Tax benefits: In some cases, the interest paid on an LAS may be tax-deductible, making it a tax-efficient borrowing option.
- Maintain investment exposure: With LAS, you can maintain your exposure to the stock market, ensuring you don't miss out on potential gains in your portfolio.
- Diverse usage: The borrowed funds can be used for various purposes, including investments, debt consolidation, home renovation, or even as working capital for your business.
- Hassle-free repayment: Loan Against Shares typically offers easy repayment options, making it convenient for borrowers.
Risks and considerations
While LAS has numerous advantages, it's essential to be aware of the potential risks and considerations:
- Market volatility: The value of your shares can fluctuate significantly, affecting the margin requirements. If the value falls too much, you may need to pledge additional shares or repay a part of the loan.
- Interest costs: While LAS generally offers competitive interest rates, the cumulative interest costs can be significant if the loan tenure is long.
- Margin calls: In extreme market scenarios, if the value of the shares pledged falls drastically, you may receive a margin call from the lender, requiring you to repay a portion of the loan or pledge additional shares.
- Loss of collateral: Failing to repay the loan can result in the lender selling your pledged shares to recover the outstanding amount.
- Tax implications: Depending on your jurisdiction, there may be tax implications associated with the interest paid on LAS. It's essential to understand the tax treatment in your area.
- Selection of quality stocks: To ensure eligibility and better terms, it's crucial to have a portfolio of high-quality, liquid stocks.
Conclusion
Loan Against Shares is a powerful financial instrument that allows individuals and businesses to access funds quickly and efficiently without having to liquidate their investments. By understanding how LAS works and considering the potential benefits, risks, and considerations, you can make an informed decision about whether it's the right borrowing option for your financial needs. Remember to conduct thorough research and consult with financial experts before opting for an LAS to ensure it aligns with your financial goals and risk tolerance.