In today’s dynamic financial landscape, individuals often need immediate access to funds—be it for a business expansion, a medical emergency, a home renovation, or an educational expense. Selling long-term investments to meet these short-term needs might not always be the best move, especially if those investments are performing well.

This is where a Loan Against Shares (LAS) comes into the picture, allowing you to unlock the value of your shareholdings without liquidating them.

Understanding Loan Against Shares

A Loan Against Shares is a type of secured loan offered by banks and NBFCs where you pledge your equity shares as collateral to avail of a line of credit or a term loan. The lender provides you with a loan amount based on a percentage of the current market value of your shares—typically ranging between 50% and 70%, depending on the lender and the risk profile of the stocks. This facility is particularly useful for those who need funds but don’t want to disturb their investment portfolio or incur capital gains tax by selling shares.

When Should You Consider a Loan Against Shares?

A loan against shares is best suited for short-term financial needs. Suppose your salary is delayed, or you’re faced with an urgent home repair or medical emergency—this type of loan can offer fast liquidity without having to sell your investments.

Since it’s a secured loan, lenders are more likely to approve the application quickly, and the interest rates are generally more affordable than unsecured options.

Interest Rates and Cost-Effective Borrowing

Since LAS is backed by collateral, the interest rates are typically lower than those associated with personal loans or credit cards. For borrowers with strong credit histories and quality shares, rates can be even more attractive.

This makes LAS an efficient choice for planned expenses like weddings, educational fees, or home upgrades. Additionally, many lenders offer overdraft facilities where interest is charged only on the used amount, offering more flexibility.

LAS for Entrepreneurs and Business Owners

Entrepreneurs and SMEs can benefit significantly from LAS. Instead of liquidating investments or opting for high-interest business loans, they can pledge shares to meet working capital needs or fund business expansion.

Many LAS products offer revolving credit, enabling businesses to borrow and repay as needed. This approach ensures that the company’s long-term investment strategy remains intact while still gaining access to essential funds.

Tax Efficiency and Retaining Investment Ownership

One of the lesser-known benefits of LAS is its tax efficiency. Selling shares may result in short-term capital gains tax, especially if the shares are held for less than a year. By availing a loan against shares, investors avoid triggering this tax event.

Additionally, if the borrowed amount is used for business purposes, the interest paid on the loan may be tax-deductible—consult a tax advisor for personalized guidance. Moreover, the ownership of shares remains with the investor, allowing them to continue receiving dividends and other benefits.

Considerations Before Opting for LAS

Despite its many benefits, LAS isn't a universal solution. Market volatility can impact the loan amount since the loan value depends on the current market price of pledged shares. If share prices fall, lenders might issue a margin call, requiring the borrower to pledge additional securities or repay part of the loan.

Also, not all shares are eligible for pledging—lenders typically maintain a list of approved stocks. The loan tenure is usually short, up to 12 months, but can be renewed with additional documentation.

Also, pledged shares cannot be traded during the loan tenure. Therefore, LAS is more suitable for individuals with stable income, sound financial planning, and a medium-to-low risk appetite.

Who Should Avoid LAS?

LAS may not be appropriate for individuals who:

• Hold volatile or low-cap stocks.
• Don’t have a clear repayment strategy.
• Need long-term funding or have unstable incomes.

For such individuals, other funding options like systematic withdrawals, fixed deposits, or traditional loans may be more appropriate.

Advantages at a Glance

To summarize, here are the key advantages of taking a Loan Against Shares:

• Ownership retention while enjoying liquidity.
• Quick disbursal, especially for demat shares.
• Lower interest rates compared to unsecured loans.
• No prepayment penalties with flexible repayment terms.
• Tax benefits if used for business expenses.

LAS stands as a smart borrowing option, especially for financially aware investors seeking to unlock the value of their assets without selling them.