Stocks that are used as collaterals to secure a loan from another entity are referred to as loan stocks. These loans earn a fixed rate of interest, similar to that of a standard loan. They can either be secured or unsecured. A secured loan against stocks is also referred to as a convertible loan since it can be converted to common shares under specific conditions. The conversion happens at a predetermined conversion rate.
What are the benefits of stock loans?
There are multiple benefits associated with stock loans or digital loans against securities. A few are given below:
1. Loan against shares provide lower interest rates
A loan against shares has comparatively lower interest rates than other unsecured loans or credit card loans. Borrowers have the option to pledge the shares as collateral when taking a loan. The loan against shares interest rates can go as low as 8% flat in some cases, depending on your stock list. Ideally, you should compare interest rates from multiple NBFCs before choosing the right one that suits your needs for a loan against equity shares.
2. Flexible repayment options with loans against stocks
When you take a loan against securities, you have two repayment options:
Here, the lender puts a limit on borrowing against the pledged shares. You can borrow an amount that fits the limit, and the loan against securities is calculated according to that amount. This limit is revised on a yearly basis so that the current value of shares can be adjusted. It is proportional in nature. If the value of your stocks goes up, your limit on the loan will also go up. In some cases, under this option, lenders also provide an option of repaying only the interest amount on a monthly basis and repaying a larger principal at the end of your tenure.
In this option, you can borrow the entire loan amount in one go. The total repayment amount, which includes both your principal and the interest, is then divided into EMIs. These EMIs are to be paid throughout the tenure of your loan. Most financial institutions have set the limit for this as Rs. 20 lakhs. However, this limit is subject to revision, depending on your stock list and credit scores.
3. Continued returns and dividends
Since the units remain invested in the market, you are eligible to avail all the benefits of your investments. If you do not default on your repayments, you will continue to receive gains. This extra income can further be used to pay off your EMIs or saved for the future.
4. Easy processing
When you plan on taking a loan on mutual funds from reputed NBFCs like Abhiloans, the process is very easy. No dependence on income proof or credit score is required as the interest rates, tenure, and other specifications are calculated based on the stock lists and their values. Also, the loan amount is credited to your account instantly within 4 hours if you consider Abhiloans. In case of emergency, these funds can be of great help.
Understanding loan against mutual funds
When you consider a loan against mutual funds, the amount is determined based on the mutual fund schemes you have invested in. Loan against mutual funds interest rate is also dependent on the financial institution you have decided to borrow from. When you take a loan against mutual funds you use your mutual fund units as collateral. A loan on mutual funds serves as one of the best options.
Understanding loan against shares
A loan against shares is when you take a loan against the shares you have in your Demat account. These come with different features as given below:
- The upper limit of the amount of loan you can avail of off your Demat shares is Rs. 20 lakhs.
- Loan against demat shares is considered to be a cheaper option when compared to personal loans since the interest rate ranges between 12-18% per annum.
- There is no requirement for guarantors, and typically there are no repayment charges.
Abhiloans is one of the best NBFCs you can consider for a loan against mutual funds or a loan against shares. When considering stock loans, it is imperative to opt for a financial institution that has sound knowledge of market function and dynamics.
When considering stock loans, one should keep in mind that, as with any loan, there are some risks involved. When you take a stock loan, irrespective of the performance of your mutual fund or stock, you still have to make the repayment.
It is recommended to carefully read and understand the terms and conditions before investing in a stock loan from an NBFC.