If you have shares and are in need of emergency cash, it's best to take loan against shares. It's important to remember that this is like a mortgage loan, which means like gold loans, unless you pay the bank has the right to sell your shares and recover the money. So, you must make sure that you are able to pay off the loan.
Minimum and maximum amount for loan against shares
This amount could vary from banks to banks. The country's largest lender, State Bank of India offers a minimum loan amount of Rs 50,000, while the maximum amount of loan is Rs 20 lakhs.
It's important to remember that in the case of SBI and the same would be true for most banks you need to have a 50 per cent margin. What this means is that if you decide to avail a loan of Rs 5 lakhs, you need to keep shares to the tune of Rs 10 lakhs in market value.
Your shares in the demat account would be pledged and you cannot sell them, unless you pay the bank and upon receiving the money it would remove the lien on the shares. It's important to note that there would be a list of approved securities by each bank, against which you can pledge your shares. These would be "A" group shares and as specified by the lender. So, in short, you cannot pledge any and every share that you might want to.
Why loan against shares is better than personal loans?
SBI currently charges an interest rate of 9.75 per cent on loan against shares. Personal loans on the other hand can cost you a bare minimum interest rate of close to 13 per cent. This makes loan against shares far more attractive.
The interest rates charged by SBI on loan against NSC/KVP and RBI Relief Bonds is much higher at 11.90 per cent.
Various charges on loan against shares
As in the case with most loans, banks do charge processing fees and of course there is always the GST charges. At the moment State Bank of India charges a processing fee of 0.75 per cent of the loan amount. So, if you are availing a loan against shares of Rs 10 lakhs, be prepared to pay at least Rs 7500 as processing charges. Apart from this, there would be a GST charge as applicable.
Just as shares, you can also take loan against your mutual fund units too. The interest rate and other charges are unlikely to differ a great deal.