Many investors reach a point where they need cash but do not want to sell their shares. The reasons can vary. The market may be volatile. The shares may be part of a long-term plan. Or selling could mean paying capital gains tax at the wrong time. In such situations, borrowing against existing holdings can feel like a sensible option.
A loan against shares allows you to raise funds while keeping your investments intact. However, it is not a simple “pledge and borrow” arrangement. Understanding loan against shares eligibility and how the loan against shares interest rate is set can help you avoid unpleasant surprises later.
How a loan against shares actually works
In a loan against shares, you pledge listed equity shares held in your demat account as security. You continue to own the shares, and you may still receive dividends or bonuses. What changes is your ability to sell or transfer them while the loan is active.
The lender monitors the market value of the pledged shares every day. Since share prices move constantly, the value of your collateral also changes. This is a key difference between borrowing against shares and borrowing against fixed assets such as property or deposits.
Because of this daily monitoring, both the borrower and the lender carry some level of market-related risk.
What lenders look at before approving the loan
Eligibility begins with ownership and compliance. The shares must be held in your own demat account and should not already be pledged elsewhere. You also need to complete standard identity and address checks.
Beyond this, lenders look closely at the type of shares being offered. Well-known, actively traded stocks are easier to accept because they can be sold quickly if required. Shares with low trading volumes or uncertain price behaviour may either attract lower limits or be rejected altogether.
Even though the loan is secured, lenders may still consider your credit history. A poor repayment track record can affect both eligibility and pricing.
Why all shares are not treated equally
This is where many borrowers are caught off guard. Not every listed share qualifies in the same way.
Large-cap stocks with steady trading activity are usually preferred. These shares tend to be more stable and easier to liquidate. Mid-cap and small-cap shares may still be accepted, but lenders typically apply stricter limits to manage risk.
During periods of market stress, lenders may also revise their approved stock lists. A share that was eligible earlier may suddenly face tighter margins.
Understanding loan-to-value limits
The loan amount you can borrow depends on the loan-to-value ratio. This ratio determines what percentage of your share value can be converted into a loan.
For example, if your eligible shares are worth Rs. 8 lakh and the lender allows a 50 per cent loan-to-value, your borrowing limit would be Rs. 4 lakh.
These limits are not fixed forever. If the share price falls sharply, the loan-to-value ratio can breach acceptable levels, triggering action from the lender.
How interest rates are decided
The loan against shares interest rate is usually lower than rates on personal loans or credit cards. The reason is straightforward. The lender holds marketable collateral.
That said, interest rates are not the same for everyone. They depend on several factors, including the quality of the shares pledged, the loan amount, and prevailing market conditions.
Highly liquid shares often attract better rates. Less stable stocks may result in higher interest costs. Some lenders also offer overdraft-style facilities, where interest is charged only on the amount actually used. This can be useful, but it requires discipline in usage.
Costs beyond the interest rate
Interest is not the only cost involved. Borrowers should also be aware of processing fees, pledge creation charges, and possible maintenance costs.
These charges may appear small individually, but they can add up over time. Reviewing the full fee structure before borrowing helps in assessing the real cost of the loan.
The risk of margin calls
One of the most important risks in a loan against shares is the margin call. If the market value of your pledged shares falls below a certain level, the lender may ask you to provide more collateral or repay part of the loan.
These requests usually come with short deadlines. If you do not act in time, the lender has the right to sell the pledged shares to recover the outstanding amount.
This makes it essential to maintain a buffer and avoid borrowing close to the maximum permitted limit.
When borrowing against shares can make sense
A loan against shares works best for short-term funding needs. It can help manage temporary cash flow issues without disturbing long-term investments.
It is less suitable for long-term borrowing. Over time, interest costs accumulate, and prolonged exposure to market movements increases risk.
Borrowers should approach this option with a clear repayment plan and a realistic view of market volatility.
Documentation and operational details
The process typically involves digital pledging through depository systems. Accurate demat details, updated records, and smooth KYC verification can speed up approval.
Most delays occur due to documentation mismatches or inactive demat accounts. Preparing these in advance helps avoid unnecessary complications.
Conclusion
A loan against shares can be useful when handled carefully. Knowing loan against shares eligibility helps set clear expectations around approval and limits. Understanding how the loan against shares interest rate is determined allows borrowers to judge affordability more accurately. Since share prices can move quickly, this form of borrowing works best when used cautiously, for short durations, and with a clear plan for repayment.
Anantha Nageswaran is the chief editor and writer at TheBusinessBlaze.com. He specialises in business, finance, insurance, loan investment topics. With a strong background in business-finance and a passion for demystifying complex concepts, Anantha brings a unique perspective to his writing.
