Loan against security

The most common loan against security is the loan against shares. In a loan against shares you borrow money from the bank and pledge your shares as a security against the money obtained. This type of a loan is called a secured loan.

What is a Loan against security?

Banks bridge the gap between savers/investors and people who are in need of money. Therefore, the primary function of any bank is to accept deposits and sanction loans. Banks collect deposits from customers. These deposits are repayable by the bank at maturity. Banks lend money to borrowers who are in need of money in the form of loans. A loan against security is one such loan. It is a loan sanctioned against a pledge of security/shares in favor of banks.

Features of loan against securities

  • Loan against security are secured loans backed by an investment/asset.
  • Securities like shares, debentures, mutual funds, bonds, life insurance policies are offered as collateral.
  • Banks accept a minimum of one and a maximum of 20 scrips. Some banks do not mention limits.
  • Mutual fund units exempt from capital gains tax (under section 54EA/EB) like REC and NHAI bonds are not accepted as collateral.
  • Loan against mutual fund units are based on their net asset value. The base NAV could be the last closing NAV or the average NAV of the previous week.
  • Loan tenure is one year. It can be renewed if required.
  • The interest rate ranges from 12-15% a year. Interest rates vary from bank to bank.
  • A processing fee of 1-2% of the loan amount is charged.
  • Prepayment penalty is not applicable on such loans.
  • The loan has to be repaid within the fixed period. If the borrower fails to make the payment, the lender can file a case for recovery and the balance amount has to be repaid within 3 years from the date of sanction of the loan.
  • Each bank has its individual list of approved securities against which the bank provides a loan.
  • Both resident and non-resident Indians can avail a loan against securities.

Why avail loan against securities?

Easy Financing

You get a loan against 50% of the value of approved shares and 50% of the value of mutual funds.

Ownership benefits

You continue to enjoy all ownership benefits of shares and mutual funds, such as bonus and dividends.

Interest rates

Interest is charged only on the loan amount utilized and not on the entire loan.

Flexible repayment

you pay interest on loan against security each month. The principal is repaid at the end of the tenure. Overdraft facility is available.

Eligibility criteria to avail a Loan Against Security

  • You have to be within the age group of 18-65 years to avail a Loan against security.
  • The tenure of such loans is generally a year. It can be extended/ renewed if required.
  • The Loan amount ranges between Rs 1 Lakh to Rs 10 Lakh for physical shares and Rs 20 Lakh for Demat shares.
  • If the borrower’s shares do not belong to a company mentioned in the banks’ list, they can’t get a loan against security in that bank.
  • Shares held in the names of HUF, minors, Companies and NRI's cannot be pledged.

Loan against security Documents Checklist for Self-Employed Business Persons
  • Photo Identity Proof (Any):
    • Driving License
    • Passport
    • Pan Card
    • Voters ID card
  • Address and Ownership Proof of residence and office (Any):
    • Ration Card
    • Passport
    • Utility Bill
    • Property Documents
    • Electricity Bil
    • Maintenance Bill
  • Business Existence Proof (Any):
    • Company Registration license
    • Shop Establishment Act
    • Tax Registration Copy
    • Last 3 years ITR Copies
  • Income Proof (Any):
    • Last 3 years ITR
    • Computation of Income, Financial Statements, Profit, Audit Report, and so on.
  • Bank Statement:
    • Latest bank statement of 1 year of current and savings account.
  • Copy of agreement executed/sale deed:
    • Share Certificate.
    • Latest Maintenance Bill.
    • Advance Processing Cheque required to process loan documents.
  • Investment Proof
  • One passport size photo
  • Professional Degree Certificate if the borrower is a professional

Benefits of loan against PPF:

  • PPF currently offers 7.6% interest a year and a loan against PPF can be availed at 2% higher interest rate. Loan against PPF is available at 9.6% a year.
  • This loan must be repaid in 3 years (36 months) and there’s no need to pledge a car or a house to avail it.
  • It’s easy to avail loan against PPF. Banks and Post Offices do not check Cibil score before sanctioning the loan.