What is Loan Against Shares and How Does it Work

Introduction

Loan Against Shares is a smart way to unlock the value of your investments without selling them. If you hold a portfolio of shares, you can use them as collateral to borrow money when you need liquidity. Whether you need funds for an emergency, personal needs or for other investment opportunities, a Loan Against Shares can provide a quick and flexible solution.

In this blog post, we’ll explore what a Loan Against Shares is, how it works, its key benefits and what you should know before opting for this loan. ICICI Bank offers Loan Against Shares as an overdraft facility and understanding how it works can help you make informed financial decisions.

What is Loan Against Shares?

Loan Against Shares is a secured loan where you pledge your shares as collateral to borrow funds from a bank or financial institution. Instead of selling your shares, you can utilise their value to meet your financial needs without losing ownership over them.

Here’s how it works:

• Pledging Shares: When you apply for a Loan Against Shares, you pledge your shares as collateral with the lender. The lender evaluates the market value of your shares and sanctions a loan of up to 50% of the shares’ value, with a maximum limit of ₹ 20 lakh.
• Collateral-Based Loan: Since the loan is secured by your investments, lenders offer attractive interest rates as compared to unsecured loans. The pledged shares continue to earn dividends and undergo potential appreciation in value.  Once you repay the loan, the shares are released.

ICICI Bank offers Loan Against Shares with competitive interest rates and flexible repayment options, allowing you to access funds without disrupting your long-term financial goals. A Loan Against Shares can be an ideal solution for individuals seeking liquidity while holding on to their investments.

How Does Loan Against Shares Work?

The process of taking a Loan Against Shares is simple, making it a convenient option for those looking for quick access to funds. Here’s a step-by-step breakdown of how Loan Against Shares works:

• Eligibility Check and Application: To get started, you need to hold shares in your Demat Account.  ICICI Bank allows you to apply for the loan online or through a Branch. The Bank will assess your holdings and determine the eligible loan amount.
• Loan Sanction Amount: Based on the market value of the shares and the LTV (Loan-to-Value) ratio, the Bank will sanction a percentage of your portfolio’s value as the loan amount. The LTV ratio is up to 50% of market value of the shares, capped at ₹ 20 lakh.
• Loan Disbursement: Once the loan is approved, the funds are made available in your overdraft account, allowing you to use them as needed for various purposes such as business expansion, medical emergencies or personal expenditures. The lender holds the shares as collateral until the loan is repaid. You can withdraw funds from the overdraft account based on your loan limit.
• Repayment Options: With an Overdraft (OD) facility, you have the flexibility to repay the loan as per your convenience. Interest is charged only on the amount you withdraw from the sanctioned limit and for the duration it is used. You only need to pay the interest on the due date, the principal can be repaid whenever it’s convenient for you or when you have excess funds. There are no fixed EMIs, providing you with greater flexibility to manage repayments based on your financial situation.
• Release of Shares: After the loan is fully repaid, the pledged shares are released back to your Demat Account. You regain complete control and ownership of the shares and any appreciation in their value during the tenure of the loan remains with you.

The entire process is hassle-free. ICICI Bank offers online monitoring of pledged shares, making it easier for borrowers to manage their loans efficiently.

Benefits of Loan Against Shares

Loan Against Shares offers several benefits that make it an attractive option for individuals who need liquidity but wish to retain their investment portfolio.

• No Need to Sell Investments: One of the biggest advantages of these loans is that you don’t have to sell your shares to raise funds. You continue to own the shares and benefit from any dividends or capital appreciation.
• Lower Interest Rates: Since it’s a secured loan, Loan Against Shares generally comes with lower interest rates compared to unsecured loans.
•  Flexible Repayment Options: You can choose from flexible repayment options. You have to pay only the interest on the due date and repay the principal at a time convenient to you or when you have excess funds. ICICI Bank offers flexible repayment plans to suit different financial situations.
• Quick Access to Funds: Loan Against Shares provides quick liquidity, making it an excellent option during financial emergencies.
• Retain Capital Gains: The pledged shares can continue to grow in value while the loan is active. Once the loan is fully repaid, you regain full ownership of the shares and any capital gains earned during the loan period remain with you.

With these benefits, Loan Against Shares is a prudent choice for those seeking funds while preserving the growth potential of their investments.

Who Should Opt for Loan Against Shares?

Loan Against Shares is suitable for individuals who need liquidity but prefer to keep their investments intact. Here are some scenarios where these loans can be beneficial:

• Business Owners: If you’re a business owner looking for short-term working capital or funds to expand your operations, Loan Against Shares offers a convenient way to raise money without dipping into personal savings.
• Emergency Situations: For individuals facing urgent expenses like medical emergencies or home repairs, these loans provide quick and easy access to funds without selling assets.
• Lower-Cost Borrowing: If you have a portfolio of shares and want to avoid high-interest unsecured loans, a Loan Against Shares is a cost-effective alternative, as it generally has lower interest rates due to its secured nature.

Conclusion

Loan Against Shares is an efficient way to access funds without liquidating your investments. It’s particularly useful for individuals who need short-term liquidity while continuing to benefit from their shareholdings. By pledging your shares as collateral, you can enjoy favourable interest rates, flexible repayment options and the potential for capital appreciation.

Whether you’re a business owner, investor or someone in need of immediate funds, ICICI Bank’s Loan Against Shares offers a seamless application process, quick disbursement and attractive terms to help you meet your financial goals. Before opting for Loan Against Shares, it’s essential to understand the terms, repayment schedule and risks involved so that you make an informed and optimal decision.

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