What is a Loan against Shares (LAS)?

Before delving into the lender selection, let’s first understand what an LAS is. A Loan Against Shares (LAS) is a type of secured loan in which you offer your shares, mutual funds, or other securities as collateral. The lender then grants a loan amount that is a percentage of the market value of these pledged securities.

Loan Against Shares can be a smart financial strategy in various situations. Let’s look at some of its advantages below.

Advantages of a Loan Against Shares:

Retain Ownership and Benefit from Growth: The primary advantage of LAS is that you retain ownership of your shares, ETFs, mutual funds, or other securities. This allows you to benefit from their potential long-term appreciation while still accessing much-needed funds.

Lower Interest Rates: LAS is a secured loan, meaning your shares act as collateral. This reduces the risk for the lender, translating into lower interest rates compared to unsecured loans like personal loans or credit card debt.

Faster Disbursal: The approval process for LAS is generally faster than traditional loans. Since the lender has collateral, the credit assessment may be less rigorous, leading to faster disbursement of funds.

No End-Use Restrictions: Unlike specific loans restricted to certain purposes (home loans, car loans), LAS proceeds can be used for various needs. You might use it for business expansion, medical expenses, debt consolidation, or a large purchase.

Improve Credit Score: Repaying your LAS on time can improve your credit score as it demonstrates responsible borrowing and repayment behavior. This can unlock access to better credit options in the future.

Flexible Repayment: Many lenders offer flexible repayment options for LAS. You can choose a tenure matching your financial capabilities, helping manage your monthly payments.

Tax Benefits (in Certain Jurisdictions): Interest paid on LAS can sometimes be tax-deductible, depending on your location and specific financial regulations. Consult a tax advisor to see if you qualify.

Important Considerations:

Market Volatility: The value of your pledged shares can fluctuate with the stock market. If their value falls significantly, the lender may ask for additional collateral or require partial repayment of the loan.

Not For Everyone: LAS is best suited for investors with a diversified portfolio and those confident in the long-term growth prospects of their pledged securities.

How to Choose the Right Lender for your Loan against Shares?

A Loan Against Shares (LAS) is a smart way to access funds without liquidating your stock market investments. But with numerous lenders offering LAS, choosing the right one is crucial for a cost-effective and smooth experience. This guide covers the essential factors to consider for a smart decision.

Key Factors for Choosing Your LAS Lender:

Reputation and Credibility: Prioritize lenders with a strong track record, positive online reviews, and strict regulatory compliance. This provides security and peace of mind.

Loan-to-Value (LTV) Ratio: This is the percentage of your pledged shares' value the lender will offer as a loan. A higher LTV means a larger loan amount. Compare LTV ratios between lenders to maximize the funds you can access. The average LTV offered in India ranges from 50% to 75%, with blue-chip shares potentially qualifying for a higher LTV.

Interest Rates: Choose a lender with competitive interest rates, as this significantly impacts your overall loan cost. LAS interest rates in India can vary from 10% to 15% per annum. Research thoroughly and seek lenders with lower rates, saving you money in the long run.

Processing Fees and Hidden Charges: Evaluate all associated fees, including processing fees, prepayment penalties, and any hidden charges. Opt for lenders

with transparent fee structures to avoid surprises and maximize your loan value. Processing fees typically fall within 1-2% of the loan amount.

Repayment Tenure: Lenders offer varying repayment periods. Choose a tenure that suits your financial capabilities to manage monthly payments comfortably.

Eligible Shares: Each lender has a list of acceptable shares for collateral. Ensure the lender you choose accepts the specific shares you intend to pledge.

Ease of Process and Disbursal Speed: Consider lenders with streamlined processes and quick disbursal timelines, especially if you need funds urgently. Online lenders may disburse funds within 2-3 business days, while traditional institutions might take longer.

Customer Service: Responsive and reliable customer service ensures support during your loan journey. Research lenders with a reputation for excellent customer support.

Essential tips for choosing the right LAS lender:

Understand Your Needs: Determine your exact loan requirement and comfortable repayment period before approaching lenders. This streamlines your search and negotiation process.

Compare Multiple Lenders: Don't settle for the first offer. Compare lenders on all key factors and negotiate for the best terms.

Read the Fine Print: Before signing any agreements, thoroughly understand all terms and conditions. Seek clarification on any ambiguities.

Documentation: Gather your financial documents (proof of income, KYC documents, shareholding statements) for a faster application process.

Unlocking Financial Potential with the Right LAS Partner

Choosing the right LAS lender requires careful consideration. Prioritizing these factors empowers you to access necessary funds while minimizing costs and ensuring a positive experience. Remember, a thorough evaluation combined with the insights provided in this guide equips you to select the perfect LAS partner and navigate your financial journey with confidence.

FAQs

How long does it take to get a Loan Against Shares approved?

The approval process for LAS is generally faster than traditional unsecured loans. If you have the right documentation prepared, some lenders may approve and disburse funds within a few days.

Can I use any type of share as collateral for a Loan Against Shares?

No. Lenders have approved lists of shares. Typically, large-cap, liquid shares of reputed companies are accepted. Check your intended lender's list before applying.

What are the risks associated with a Loan Against Shares?

The primary risk is market volatility. A significant drop in your pledged shares' value could lead to a margin call (demand for more collateral or loan repayment) from the lender.

Are there alternatives to a Loan Against Shares?

Yes. Alternatives include:

Margin Funding: Offered by brokers, but generally for short-term needs.

Overdraft Facility Against Shares: Linked to your Demat account. May have limitations and higher interest charges.

Personal Loan: Unsecured, usually with higher interest, but doesn't require share collateral.

What is a typical range for Loan-to-Value (LTV) ratios?

While LTV ratios vary between lenders, you can generally expect somewhere between 50% to 75% of your pledged shares' value as a loan. Higher-value, liquid shares may attract a higher LTV.