Do you have an urgent need for cash? Is there a significant sum you’ve put into the loan against the stock market? When applying for a loan, did it occur to you that pledging your shares may improve your chances of being approved? You may use your shares as collateral to acquire a loan against shares. Loans are often issued for sizable sums, with a reasonable loan against shares interest rate and convenient repayment schedules. The only cost to you will be the interest accrued on the loan amount you use. Read on to find out what a DEMAT account is, why you need one, how to open one, and what you can do with one.
How do stock transactions work?
Shares are the units of ownership in a corporation. Companies issue loans against stock to the public to raise capital for expansion, product development, and other purposes. When you invest in a company by buying shares, you get partial ownership of that business.
Let’s imagine you bought 20 shares of Company XYZ for INR 100. Your friend waits a few days and then buys 35 shares when the share price decreases to INR 80. Even if you both made your investment and may have different share units, you are still considered shareholders in the company. If you do not sell all your shares, you will continue to be a shareholder.
Get a loan against share: A brief guide
A loan against shares is often considered a secured loan since you use your existing shares and assets as collateral. Just a few banks in India offer Loans Against Shares; thus, you should check with your potential lender to see whether they provide it before applying. Further, it would help if you verified that your DEMAT account is active and held by a recognized Depository Participant (DP). A link must be established between the DP and the Central Depository Service Limited or the National Security Depository Limited (NSDL), the two national depositories in India (CDSL).
Following the loan’s approval, you’ll need to decide which loan against stock to use as collateral, keeping in mind that most lenders will not provide Loans Against Shares for businesses that aren’t in household names. When the lender releases the loan funds, you may use them to cover whatever costs have arisen. Using Loan Against Shares, you won’t have to liquidate your stock holdings. The value of the pledged shares fluctuates due to changes in the market.
Eligibility for a loan against shares
You may be qualified for a Loan Against Shares if you match the following criteria.
- You must be between the ages of 21 and 70.
- You need a CIBIL of 701 or above to qualify for the best rates.
- Residents and non-residents of Indian descent are both recognized nationalities.
Reasons for getting a loan against shares
Only Debt Mutual Funds for Shares are eligible for the high loan amount of up to INR 5 crores, with a maximum of INR 20 lakhs loan amount. This is the most enticing benefit of using your loan against stock as collateral for a loan. In this case, money can only be used for necessities and emergencies.
Residents will not be allowed to engage in the following:
- With an unlawful or antisocial motive.
- Investment between corporations, or the acquisition or maintenance of a position of influence inside a business or corporation.
- To invest in a loan against stock, bonds, debentures, or join a different mutual fund program.
Borrowers who are not permanent U.S. residents are prohibited from using their loan money for the following purposes:
- Funding a non-resident alien retirement account (NRE) or foreign currency-neutral reserve account (FCNR).
- Any money borrowed cannot be taken out of India.
- Lending money, running farms or plantations, investing in the property market, etc.
- All business dealings involving The Chit Fund Company
- Nidhi Company’s capital market transactions using transferable development rights (TDRs), including derivatives and margin trading
Like an overdraft facility, interest is only accrued on funds drawn from a Loan Against Shares account. Unlike other forms of collateral, your pledged shares will not be sold at auction. After you have paid off your loan, the lender will give back your loan against stock so that you may start trading again.
As a secured loan, Debt Against Shares may offer you an attractive loan against shares interest rate; in the event of nonpayment, the lender liquidates the pledged shares to repay the loan.
DEMAT account: Is it important for loans against shares?
Yes. If you wish to borrow money against the value of your shares, you will need a DEMAT account. You can convert your shares into a dematerialized or electronic form by creating a DEMAT account with your broker or lender, provided that your shares are not already in one of these forms.
A DEMAT account is an electronic storage system for assets such as shares. This kind of account is also frequently referred to as a dematerialized account. Because of this, it is much simpler for the shareholder to keep several shares from different firms and to transfer them as necessary.
Shares kept in a DEMAT account may be pledged as collateral for loans obtained from a financial institution also participating in the depository system. If you want to borrow money from a bank, you have to place a lien on your stock. This gives the lender the right to sell the security if you cannot repay the loan you owe them.
Investing in the stock market may provide one with several benefits. It is a significant benefit to have the option to swiftly borrow money by pledging shares as security for the loan. By taking out a loan against stock, you can borrow money and ensure your financial future. Competitive returns may be obtained on investments of up to INR 5 crores by investing in debt mutual funds with share limits as high as INR 20 lakhs. To learn more about loans against shares, consult an expert from Piramal Financing House; they will guide you!