Tips For Becoming Eligible To Borrow Against Stocks

In the turbo speed of the modern age of finance, instant mobilization of funds without going through the pain of selling your investments is the need of the hour. A stock loan is one such hassle-free option for investors who need liquidity without bidding adieu to ownership of their equity portfolio.

To most Indian investors, it would be a relief to know the rules for being eligible to take such loans. This article gives important directions on being eligible for taking a loan against stocks and information about how interest on the loan against stock is computed.

Knowing about loan against stocks

Stock loan is a funding facility that is collateralized, whereby lenders place their listed securities or stocks of equity on a lien to raise cash. Unlike personal unsecured loans, the transaction leverages your investment portfolio to generate liquidity at relatively competitive interest rates.

Indian banks and financial institutions along with non-banking financial companies (NBFCs) provide this facility, advancing usually a proportion of the market value of the stocks being pledged. Loan against equity interest depends on a number of parameters including lender's policy, borrower's credit history, and security quality to be pledged.

Eligibility criteria for loan against stocks

Prior to availing a loan against stocks, being aware of the general eligibility requirements facilitates the loan process. Some of the major considerations usually followed by the lenders are:

• Age consideration: The majority of the lenders follow an age condition between 21 to 60 years.
• Original documents of KYC: Aadhaar card, PAN card, address proof, and income need to be provided.
• Listed share holding: Borrowers should hold stocks listed in prominent Indian stock exchanges like BSE or NSE. Unlisted and illiquid stocks are generally not taken.
• Portfolio value: The pledged stocks' value usually should range between Rs. 1 lakh and Rs. 2 lakhs, depending on the lender.
• Credit history: Good credit record (generally CIBIL score > 700) will improve the chances of approval and lower interest rates.

Obtaining good on such criteria is the basis for approval for a loan.

Guidelines to become eligible to avail loan against stocks

Borrowing against stocks is a simple means to obtain money without selling your investment. Qualifying for this, however, involves fiscal responsibility, budgeting, and the optimal portfolio approach. From having quality holdings to selecting the perfect lender, these are important tips to maximize your qualification and get rich loan terms.

Have a diversified quality stock portfolio

Lenders like stocks of solidly fundamented companies, liquid stocks, and those more stable in market performance. Blue-chip stocks are worth more and can qualify for a higher Loan-to-Value (LTV) ratio. Over-concentration on volatile or speculative stocks may lower eligibility or have a higher loan against stock interest rate charge.

Ensure your portfolio is diversified, comprising familiar stocks from industries such as banking, IT, FMCG, or manufacturing. Not only does this enhance acceptability but also assures lenders that the risk is reduced.

Have a good credit score

Good credit history is a reflection of your paying spirit and your money sense. Banks and NBFCs give much value to credit history while sanctioning a loan against stocks. Keep a track of your CIBIL or other reports frequently.

Never miss any pending loans or credit card dues payments. Payment of dues and timely payment ensure that your application is given lower interest rates and quicker approval.

Keep documents ready

Adequate and correct documentation will speed up the loan process. Documents needed are:

• Address and identification proof
• PAN card
• Income proof (salary slips, photocopy of ITR)
• Share-holding proof (demat statement)

Update all documentation and make sure original documents are accessible if needed for verification.

Select the right lender

Various credit policy and rate of interest are offered by financial institutions. Identify some banks or NBFCs that offer securities-based loans. Verify their processing fee, repayment tenor, and interest rate on loan against stock.

Certain lenders offer tailor-made solutions based on your portfolio, thereby bringing down your borrowing cost and tenor.

Have margin amount in hand

Lenders require a margin, so you don't borrow 100% of the value of your stock. Normally, it is 50% to 75%, depending on the loan contract. Margin protects both you and the lender from market volatility.

Make sure you have enough money or other securities if needed to pay this margin in order to be eligible for the loan.

Be aware of market conditions

Share prices fluctuate constantly. Since borrowing power is calculated based on prevailing market prices, sudden falls in share prices can lower your borrowing power or invoke margin calls.

Watch market conditions and do not use highly volatile stocks in times of turmoil to avoid lender anxiety or further requests.

Prepayment to avoid penalty and extra interest

Following payment schedules prevents further worsening of your credit standing and payment of fines. Timely servicing of the loan also provides good terms for future loans and maintains the interest rate on loan against stock at bay.

Factors affecting loan against stock interest rate

Having knowledge about factors affecting your loan against stock interest rate helps in efficient loan planning:

• Credit history of borrower: Higher rating of creditworthiness ensures lower interest rates.
• Repayment tenure: Longer tenors sometimes need higher interest.
• Market value and quality of the stocks: Blue-chip stocks need higher interest rates than mid-cap and small-cap stocks.
• Cost of administration and risk assessment of lender: All lenders need interest rates based on their risk and administration cost.
• Algorithms: RBI policies will indirectly influence interest rates in the securities lending segment.

Bargaining and matching on the basis of your portfolio and credit record can result in an optimized interest rate.

Benefits of borrowing on stocks

• Easy access to funds: Loan processing may be quicker than unsecured lending.
• Dividend and ownership benefits: Owners still enjoy ownership benefits and dividend payments.
• Competitive interest rate: Loan character with a secured loan provides competitive interest rates compared to unsecured personal loans.
• Convenience of usage: The funds can be utilized for business purposes, personal purposes, or investment schemes.

These benefits of loan against stocks provide them with tremendous potential as an instrument of financing for Indian investors.

Situations to be avoided during the application for loan against stocks

Borrowing from stocks is a great liquidity option, but avoid some dangers because they can lower your approval chances or raise borrowing risk. Following are critical mistakes to avoid:

• Don't collateralize with illiquid or volatile stocks: Invest in blue-chip, high-turnover stocks which lenders prefer to obtain more fair valuation and approval.
• Ensure timely documentation: Inaccurate or incomplete information provided can cause delay or rejection of your application.
• Be cautious about margin calls: Declining share prices can result in margin calls. Defaulting can result in mandatory selling of collateral stocks.
• Borrow sensibly: Don't borrow a loan quantum which you are unable to repay on time. Delayed EMIs will damage your credit rating and impose penalty fees.
• Know interest cost implication: A high loan against stock ratio can substantially raise your repayment if not worked out properly in the initial stages itself.

Stock loan is a perfect financing choice for the investor to attain access to liquidity of his or her investment portfolio. Being specific in the eligibility criterion, good credit rating, and choosing high-grade securities, all work in your favor to qualify on the favorable side. Furthermore, comparison and critical analysis of the loan with stock interest rate of various lenders can result in substantial interest cost savings.

Indian investors, if they use these guidelines judiciously, can avail this facility quite easily and provide liquidity at the right time without jeopardizing their long-term investment strategy.