You can now take a loan against the equity shares held in your Demat account. This is a convenient way in which you can get the money you were looking for without having to sell any of your assets. You can simply draw a loan and use your equity holdings as collateral. Although, in this case, your shares are being used as collateral, when the company you have so thoughtfully invested in rolls out dividends/bonus shares/stock splits/rights issues, you are still entitled to all those benefits.
It is recommended that you should take a loan from the same account where they have their Demat account. In this case, since the financial institution is the provider of your Demat account, they have the collateral right there with them, so they don't have a lot to worry about. The process in such a situation becomes more convenient for the investor as well. The entire process of obtaining a loan becomes much smoother than going to another financial institution and referring to a Demat account that you have someplace else.
The interest rates for these loans are much cheaper than what you would have drawn from a personal loan and can vary somewhere between 12-18%.
Unlike the traditional banking system, the loans against equity shares are free from pre-payment charges. You can prepay the loans whenever you want to, without worrying about additional expenses.
Here is the list of eligibility criteria that entitles you to draw a loan against your equity shares:
(i) The Age Factor
Almost all the major financial institutions have set a definitive age range, wherein any investor who is willing to draw such a loan should be a part of that age group. A few banks have set it at 18-65 years, while some follow the 21- 65 years range.
(ii) The Nationality Factor
Many financial institutions have made it clear that they would deal only with individuals of Indian origin when they want to disburse loans against equity shares.
(iii) The You Factor
Some financial institutions insist that only the shares in the name of the individual can be pledged. You cannot bring in minors, NRIs, HUFs, and corporations into this.
(iv) The Documents Factor
You will have to produce a series of documents, including identity proof, address proof, proof of income, a passport-size photo, and a statement from your DP.
(v) The Insider Factor
Many financial institutions focus on the theory that an individual applying for a loan must not hold influence over the company whose shares are being pledged - such as a Director or a Promoter.
(vi) The Minimum Security Value
Some financial institutions focus on the account holder to bear a minimum- security value before they are eligible to apply for a loan against their shares.
Conclusion
Granting loans against equity shares is an excellent way in which investors can gain access to the desired money without worrying too much about the collateral or interest rates. However, you should never take a loan to increase your market exposure. A loan taken to overcome a loss in the portfolio can prove disastrous. One unfavorable market swing can magnify your debts. It is recommended that such practices should be avoided.
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