Loan against shares is yet another option, that one has to take loan against a pledged security. Loans against shares is given against your shares as a collateral. But, they bring along some disadvantages.
1) Interest rates are high
The interest rates against mortgaged backed securities, should generally be low, because there is a collateral that is involved. However, this is not the case. Some bank charges are extremely high on this account. For example, State Bank of India's charges works out to almost 16 per cent. Bank of Baroda's interest rates work out close to 14 per cent. This is as good as personal loan interest rates. So why pledge your securities with the bank or institution, when you can get similar interest rates under a personal loan, without any collateral.
2) Not all scrips eligible for loans
If you have some shares that are in the B group, that would not be calculated for eligibility of loans. Most banks have their own list of approved securities. One individual was complaining recently that he had huge holdings in a government owned bank (United Bank), but, that was not considered as an approved security for the purpose of loan. If you have a large chunk of your portfolio in these securities than it is sheer bad luck, as you would get a lesser amount for loan against shares.
3) Loan to value very low
The loan to value amount in the case of jewellery is much higher at 70 per cent. This means, if I have jewellery priced at Rs 1 lakh, I could get a loan of as high as Rs 70,000. On the other hand, if I have shares valued at Rs 1 lakh, I get a loan of Rs 50,000 only. That too the shares, must be among the approved list of securities.
4) Unable to sell shares if they trade higher
In case the stock markets trade higher, you cannot sell your shares, as the bank has marked a lien on those shares.
This means you may lose the opportunity to sell the shares at a higher price. Also, if yu are unable to pay the loan amount, the bank may has the right to sell the shares and you may lose yur blue chip stocks.
5) You cannot use the amount for all purposes
The bank asks the individual taking the loan, to sign an undertaking that you would not use the amount for speculative purpose. It's very difficult to understand what "speculative purposes" would mean. So, if you want to take a loan to buy additional shares, when the markets has crashed, you might not be permitted legally to do so.
Loan against shares is not the best loan you can avail. Loan against gold offers the same competitive interest rate. You also get a higher loan to value. Also, you would get trapped in case the shares climb and you want to sell the same. All in all, it is not the ideal loan, unless you have exhausted your choices. So, you may well avoid loan against shares.