5 Things to know About Loan Against Demat Shares

What is Loan Against Demat Shares?

As the name suggests, a loan against Demat shares refers to a loan you can use by mortgaging the shares you hold. This facility may come as a blessing when you struggle to get the funds required to sail over a short-term financial crisis. While some investors may sell their shares to arrange the funds required, an informed investor applies for a low-interest loan against Demat shares to tide over the crisis without liquidating the shares. 

When you apply for a loan against Demat shares, the lender calculates the present market value of your shares and offers a percentage of the total amount as a loan. Just like a regular loan, you repay the principal and interest (as EMI or Equated Monthly Instalment) until the loan amount gets cleared in full. But, if a borrower wants, they can even pay an uneven amount until the end of the loan tenor. If a borrower fails to repay the loan, the lender liquidates the shares in the open market to recover their dues.  

Five Things to Know Before Applying For a Loan Against Demat Shares

Choose The Financial Institution Carefully

A maximum loan against Demat shares is one of the most cost-efficient ways to get the cash you need. However, most borrowers ask the financial institution they should choose while applying for a loan against Demat shares. Choosing a financial institution is crucial for getting the maximum benefits. 
You can choose between two types of financial institutions to apply for a loan against Demat shares - banks and stockbrokers. It is always wise to apply with the institution you maintain your Demat account with. 
For example, if you have opened a free Demat account with 5Paisa, you can get the best rates by applying for a loan with 5Paisa. Since the financial institution maintaining your Demat account already possesses the shares, they can conveniently keep the shares as security to provide you with the funds you need as the loan.

Know The Benefits Well

Another common question that borrowers ask when availing of a maximum loan against Demat shares is what happens to the pledged shares. You will continue earning the same benefits from your shares as you get before pledging them. 
For example, if the company declares a dividend, you will get the amount in your bank account on the date of dividend disbursal. Similarly, if the company issues a bonus, you will get the extra shares in your account, which you can sell at any time. Also, you remain the legal holder of the shares until you repay the principal and interest in full. Hence, a loan against the Demat account lets you remain the official shareholder while enabling your shares to work for you.  

Eligibility

Before you apply for a loan against Demat shares, discover whether you are eligible for a loan or not. The following are the typical eligibility requirements for the loan:
•    Your age must be over 18 and less than 65.
•    The shares you want to pledge must be in the name of one or more individuals. The shares held by minors, Non-Resident Indians (NRIs), Hindu Undivided Families (HUFs), and corporations cannot be pledged. 
•    Submit documents like a PAN card, an Aadhaar card, income proof, and the DP account statement while applying for the loan. 
•    If you are the promoter or director of a company, you cannot avail of the loan against shares of that company. 

The Features

A loan against Demat shares is a lot different from other loans. The following are the top features of a loan against shares:
•    The maximum loan against Demat shares is usually INR 20 lakh. 
•    The interest rate of loans against shares is usually between 12% and 18% per annum.
•    You do not need any guarantor to apply for a loan against shares. 
•    You can prepay or pre-close the loan without paying any prepayment charges. 
•    Lenders, such as banks or stockbrokers generally assess the value of shares weekly.

Things You Must Avoid

Like any other loan, a loan against Demat shares is a liability. Hence, you must use the funds responsibly. Some borrowers invest the loan amount to buy more shares. But, share investments are generally speculative, and no one can guarantee the returns. And, if the market goes against your predictions, you may lose a considerable amount. 
It is wise to use the amount to address legitimate financial issues. There is no limit to using the amount; you can use it as a personal loan or loan against property. 

Open A Demat Account to Experience Seamless Trading

5Paisa offers a free Demat account to help you transact seamlessly in the stock market. You can get a host of benefits with a Demat and trading account.

Open an account with 5paisa and experience rewarding trading.