To increase the value of your money, you invest. But what if the money is invested in securities and you need it right away? Selling them would decrease your income and prevent you from taking advantage of any potential future chances. Loan against securities is a wonderful option for meeting your short-term financial demands since you don't have to sell your stocks immediately.
These loans come in quite handy when you need money right away for either a personal or professional reason. With a payback duration of up to 36 months, loans secured by shares are a common way to obtain short- or long-term loans. Each lender has a different list of securities that they would accept as collateral for loans, and the maximum loan amount is Rs. 20 lakh.
In essence, when you take out a loan against shares, your shares are kept as collateral. You continue to reap the rewards of your share investments even when your shares are pledged as collateral for the loan. This entails obtaining and keeping not just the dividends but also any bonuses and rights that are due to you.
Eligibility criteria to avail a loan against shares
- The age of the borrower must fall between 18 and 65.
- Only shares registered in an individual's name may be pledged. You are not permitted to pledge shares in the names of companies, HUFs, NRIs, or minors.
- Shares of a corporation in which you are a director or promoter cannot be pledged.
- Additional requirements include submitting few documents including a statement from your DP, proof of address, identity proof and proof of income.
Even while getting a loan against the shares in your demat account is a practical choice, it's crucial to use these cash sensibly and carefully. Some stockholders exclusively use loans secured by their shares to reinvest their proceeds back into the market. However, if the market enters a bearish trend, this move might cause significant losses because you still have to pay the financial institution's interest.
As a result, it is advised against using this tactic. It is preferable to use the loan amount for immediate financial needs or to achieve short-term financial goals. These can involve providing funds for investments in businesses as well as paying for home, wedding, and other costs.