Pros & Cons of Taking a Loan against Shares

Pros & Cons of Taking a Loan against Shares

The stock market can be a good place to make profits, and a share of the stock market can get you a loan as well. You can use the loan from the stock market to fulfil your desires and needs. Banks offer loans which help in your purchase from electronic appliances to brand new cars. The process of lean is pretty easy as when you apply for the lender will check your credibility, and if all goes well, the amount will be sanctioned to your account. This process is similar in almost all banks except when it comes to significantly big amounts. Bigger loans like home loans and mortgage loans also follow similar methods but require collateral to get approved.

Financial institutions are not limited to people who want to make an expensive purchase. It is also available for people who need a loan for an emergency. Banks offer loans like credit card loans, personal loans and minor debt consolidation loans to the applicants without collateral. While the loans will need security, today, banks have further extended their scope of collaterals to share market investments.

Loan against shares is a great way to lend money from banks without losing your financial assets. If you are planning on taking a loan from the banks based on your shares in the market, here are some pros and cons that you need to consider before you make the final decision.

Pros

Lower Interest Rates

Interest rate plays a vital role in repaying back the loan. It is the sum of the lender charges for the loan you took every year. If you have been thinking of taking a loan lately, you must be familiar with this term. The interest rate unsecured loans and secured loans have a huge difference in the interest rates as secured loans have comparatively very low-interest rates in comparison to other lending products.

No specific purpose

The lender will not ask you the purpose of the loan unless it is a very big amount. It is similar to personal loans where you do not need a reason for approval of the loan. You can use the loan amount to settle an old debt, finance medical expenses or buying something you wanted.

No prepayment charges

Most of the lenders have a fixed tenure for repaying the loan, which is generally one year. It can be further extended by paying a particular amount. The lenders do not charge applicants for prepayments if the tenure is already very low.

Cons

Loan to value

If it is your first time to take such a loan, you will not have the full freedom of taking as much loan as you want. It will be decided by the lender. The lender only offers 60-80 percent of the value of the collateral.

List of companies

While evaluating your database, the lender often pays close attention to the companies whose names are in your stocks list. If the company does not belong to the list that the lender has, your application will be rejected.

Selling of stocks

Once the loan is approved, you will lose authority over the stocks partially. Which means that if in the middle you will feel like selling your stock, the loan will stop you from doing so. You will get the full authority only once you repay the entire loan.