Is a Loan Against Securities a Good Idea

Is a Loan Against Securities a Good Idea

As uncertain times mount, many people scramble to raise funds for emergency requirements. Even if you do not have emergencies to contend with, you may still wish to take a planned loan for any future requirement, like your child’s higher studies abroad. If you have a substantial corpus of investments, especially in stocks, you can avail a loan against shares. Leveraging your investments in this way may serve your financial needs well. 

How Does it Work?

Most people are unaware, when they first open a demat account, that this facility is available to them at any future date. A loan against securities works in much the same way as any other loan, and you can apply for amounts that are equal to the value of your held shares. Additionally, the borrower still gains from any share profits, dividends, bonuses, etc. during the tenure of the loan. If you have invested in stocks for the long run, it's a good idea to take a loan against your equity investment. With such loans, investors can meet shortfall fund requirements and still have enough wealth to fulfil long-term financial goals. 

Consider a Loan Against Shares

If you are thinking of investment, you may want to view shares as a good way to earn good profits in the long run. You could also invest in a potentially good upcoming IPO, as this means you would own shares in a company that may grow in the future, giving you profits. This increases your avenues of capital growth and the raising of funds in the future. Here are some more good reasons for taking loans against securities: 

  • Taking a loan against shares is especially a good idea when markets are on the rise. 
  • If you take a loan against shares, there is no restriction on how you use the loan. 
  • Loans of this nature are availed as an overdraft facility. You get a credit limit which is pre-sanctioned according to the securities pledged to take the loan. From the sanctioned amount, borrowers may use any amount they wish to. 
  • Borrowers have the option of making loan repayments whenever they wish to do so, till the overdraft facility expires. 
  • Interest on the loan is only charged on the amount withdrawn until repayments are made. 

Think of Share Market Volatility

Potential borrowers may be apprehensive about taking a loan against securities for the simple reason that securities are prone to be affected by any volatility in the stock market. However, lenders periodically do a revaluation of securities that are pledged in a loan against shares. Moreover, during the course of a market correction, lenders may do an assessment. In case of a steep market correction causing the total amount drawn to go over the credit limit sanctioned, the borrower must bridge the difference. This can be done by a cash payment or pledging more securities. 

Raise Money Wisely

The goal of most investors is portfolio diversification, and this means that you should open a demat account and allocate part of your wealth to stocks. As long-term investment goes, stocks historically show reliable rewards. A wise way to invest in a company’s stock is by applying for an upcoming IPO subscription of a company with good prospects for future growth. Apart from the growth of your capital, stock investment can help you to take a loan, should you ever require one. 

Related Articles: Follow these 5 Expert Advices to Get Started with Investing | 4 Investment Mistakes New Stock Market Players Must Avoid at All Cost | 5 Rules Every New Investor Must Know Before Investing |  10 common mistakes made by SIP investors | 4 Smart Must-Follow Investment Tips for Beginners in India

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