Life can surprise you anytime and for all types of situations, you must be ready with emergency funds. This is where you can smartly use your equity shares as collateral to avail a loan from the bank. These are known as Loan Against Equity Shares. Banks offer an easy online application procedure through which it is faster to get the money. However, during the loan application, there can be many mistakes that you can commit, but must be avoided.
Check this blog and learn about the most common mistakes when you are planning to apply for a Loan Against Shares.
What Mistakes to Avoid When Applying for a Loan Against Equity Shares?
Below are some of the most common mistakes to avoid when you are getting a loan on your securities and shares:
Not researching the loan offers
A major mistake that applicants make is not comparing different banks before applying. Each bank offers different interest rates, loan-to-value (LTV) ratios, service charges, and repayment options. Some banks may disburse faster, while others may offer better customer support or accept a wider range of shares. Many also have specific lists of approved stocks that they accept as collateral. Also, know that applying with the same bank that holds your Demat Account can also be quicker and more convenient.
Not checking the eligibility criteria
Many applicants forget to check whether they are eligible for a loan against shares. Every bank has specific eligibility rules. Usually, you must be an Indian citizen aged between 18 and 75 years. You cannot apply using shares held in the name of minors, companies, HUFs, or NRIs. You must also not be a promoter or director of the company whose shares are being pledged. Submitting the required documents like PAN, Aadhaar, proof of address, income details, and Demat Account statement is also important. Ignoring these rules may lead to rejection of your application.
Not understanding the full benefits of LAS
Some investors think selling their shares is the only option during emergencies. But by doing so, they lose out on long-term gains. With Loan Against Shares, you continue to hold your shares legally, even after pledging them. You will still receive benefits like dividends, bonus shares, and rights issues. If the share prices go up, you enjoy the gain while still having access to funds. It’s one of the key benefits of this type of loan, using your shares as security without selling them.
Ignoring charges
It’s important to look beyond just the interest rate. LAS comes with additional charges such as processing fees, pledge and de-pledge charges, maintenance or renewal fees, and sometimes account closure or foreclosure fees. You may also be charged for services like NEFT, RTGS, or ATM usage if you are using an overdraft account linked to your loan. If you don’t check these charges in advance, you might end up paying more than expected. Always ask for a detailed fee structure before applying.
Taking a loan without a repayment plan
Many people take a loan without planning how they will repay it. Since Loan Against Shares works like an overdraft, you pay interest only on the amount used. But if you don’t repay the interest on time or cross your limit, the bank can sell your pledged shares. This risk increases during market fluctuations. Always borrow only what you truly need and prepare a proper repayment plan. Paying on time also helps protect your credit score and avoids unnecessary stress.
Not monitoring market movements
Your pledged shares stay invested and are subject to market risks. If the market value of your shares drops, the LTV ratio may go below the allowed limit. In such a case, the bank may ask you to add more shares or cash as collateral. If you fail to do this, your shares may be sold to recover the loan. That’s why it’s important to track the market regularly and choose stable, large-cap stocks as collateral where possible.
Not setting payment reminders or auto-debit
Missing payment due dates is another common and avoidable mistake. If you forget to pay the interest or fees on time, you may be charged penalties. Worse, it could impact your credit score. To avoid this, set up auto-debit instructions from your savings account or schedule reminders through mobile apps or SMS alerts. This way, you can ensure timely payments and avoid stress later.
Check Your Eligibility For Taking a Loan Against Equity Shares to Avoid Rejection
Learn about the key conditions that are needed to take the loan:
- Age Limit: Applicant must be between 18 to 75 years of age.
- Contact Details: A valid email ID and mobile number are mandatory for communication and verification.
- Individual Applicants must submit:
- Identity Proof (PAN, Aadhaar, etc.)
- Address Proof (Utility bill, Aadhaar, etc.)
- Signature Proof (Cancelled cheque or signed document)
- Companies or Firms must provide:
- Income Tax Returns of the past two years
- Audited Balance Sheet
- Profit & Loss Account for the last two financial years.
Conclusion
A Loan Against Equity Shares can be a useful tool to unlock the value of your investments without selling them. But like any financial product, it must be handled carefully. Avoiding common mistakes, like skipping research, ignoring eligibility rules, borrowing more than needed, or missing payments, can save you time, money, and trouble.
By planning well, reading the fine print, and using your shares wisely, you can make the most of a loan against shares while protecting your investments for the long term.