Guide to Loan against Demat Shares.
We all would agree to the fact that obtaining a loan, whether to meet any financial emergencies or to achieve specific goals has become easier and more accepted than it’s ever been. However, owing to the huge demand, they come with high lending rates; making them unattainable and unaffordable for a large number of individuals. To add, they also require the deposit/mortgage of valuable items such as houses, making them a riskier choice. That’s when Loans against Demat Shares comes to the rescue.
If you need a loan but don’t want to risk your physical assets, a loan against Demat shares can help you secure a loan while still allowing you to make the most of your stock market investments. Since this is something that is known by very few investors, we will be discussing this topic in today’s article.
What do you mean by Loan against Demat Shares/ Securities (LAS)?
- A loan against your Demat securities is a method of borrowing money by offering your shares as collateral.
- It allows you to cash in on your investments without having to sell them to recover the funds. Apart from the existing shares in your Demat account, a loan against Demat shares requires no security or add-on securities.
- These loans are available on a variety of instruments, including Mutual Fund Units, Stocks, Bonds, Non-Convertible Debentures, and other government-sponsored schemes.
Simply put, when you opt for a LAS; the lender determines the current market value of shares & provides you with the percentage of the loan that you are eligible for.
You then have to repay the dues i.e., the principal & the interest amount in the form of EMI i.e., Equated monthly installments until the loan is fully paid. This works the same way that a normal bank loan does. However, if a borrower so desires, they can pay an uneven amount until the loan duration expires. When a borrower defaults on a loan, the lender sells the shares on the open market to recoup their requisite margins and LTV(loan to Value).
Attributes of Loan against Demat Shares
The loan you take out against your Demat account shares has several elements that set it apart from other types of loans.
1. Loans against securities(LAS) are usually less expensive than personal loans, etc. One can compare the interest rates offered and take advantage of the investments.
2. Guarantors are not required for loans secured by Demat shares. Furthermore, these loans usually do not impose any prepayment penalties.
3. Every week, the value of the pledged shares is calculated in order to account for any market variations.
4. In most circumstances, a loan against securities can be obtained for as little as ten lakhs and as much as a hundred crores or more, depending on the prerequisites and fitting.
5. An individual can also pledge securities of their family members (i.e., the blood relatives) such as spouse, parents, children &, etc. However, in such circumstances, a blood relative must sign the overdraft agreement as a co-applicant.
6. You will be able to reap the benefits like corporate actions of your pledged equity shares/securities. For example, if the company announces a dividend, you will receive it as usual, and if the company issues bonus shares, you will be eligible to collect them regardless of the number of shares pledged.
Furthermore, you are the legal owner of the shares until the principal and interest are paid in full. And so, a loan against the Demat account allows you to keep your official shareholder status while also allowing your shares to trade.
7. You may not have to struggle to pay interest on the entire loan amount if you take out a Loan against Securities. Only the amount of the loan that you use will be charged interest.
8. Other than these, an individual can avail of other benefits such as – swapping the securities pledged, availing of the loan through online mode & getting the loan approved through an easy & convenient procedure.
What are the eligibility criteria to obtain a Loan against Demat Shares?
Before proceeding, you must first check your Demat account to see if you are eligible for a (LAS). Once done, you can proceed ahead. The following are the eligibility requirements:
1. Depository account holders must be at least 18 years old but under 65 years of age. In addition, you will be asked to submit a number of important documents. The list of required documents will include – Proof of identification, residency & income, with a statement from your DP for authentication purposes.
2. Individuals, HUFs, and business firms can all use the LAS facility by pledging their shares. In addition to this, as an organization, a HUF, or a non-individual entity, you can request a loan against securities but your company should be a registered one that has been in operation for at least two years.
3. A Director or the promoter of the company is not allowed to pledge the shares – However there are different forms to obtain the loan like Promoter funding etc.
How does the Disbursement process of LAS Work?
Borrowers who are interested in taking out a LAS can do so in one of two ways: online or offline. The eligibility criteria will vary from one lender to the next, but the majority of the rules will remain the same. Lenders may require certain documents to approve your loan, once these documents are verified the loan is availed.
You’ll get a current account with an overdraft and a limit. You can withdraw any amount up to the limit and use net banking or ATM facilities to raise emergency funds whenever you need them.
Do we have the option of foreclosing or making partial payments on LAS?
When closing or paying off a loan, there are usually no foreclosure or partial payment fees. These terms, however, can be confirmed with the financial institution from which you are taking out the loan before you take it out.
Is seeking a mortgage against Demat shares lawful?
Yes. Loans backed by Demat Shares are legally allowed. The regulations were first issued by SEBI in 1997, and they have been last revised in the year 2018. All financial institutions operating in the Securities market (India) are allowed to give and receive funds if the guidelines for the same are being followed.
You can benefit from your capital market investments by getting a loan against your Demat shares. Moving forward, a loan against Demat shares is a liability, just like any other debt. As a result, you must spend the money wisely. It’s a good idea to put the money toward legitimate financial problems.
There is no limit to using the amount; you can use it as a personal loan or loan against property. Here, the goal is to identify the correct financial institution which can offer you a suitable Demat account as well as the option of taking out a loan against your Demat shares. And therefore, the investor pledging the securities can avail of this facility after comparing the above-given pointers & choosing the one that best suits them.
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