Thinking of borrowing against your shares? Read this first

Representative image

• A loan against shares lets you borrow by pledging shares or equity mutual funds
• LAS offers lower interest than personal loans but carries market-linked risks
• Forced selling risk arises if share values drop and margin calls aren't met

Did our AI summary help?

If you own shares or equity mutual funds and need cash urgently, a loan against shares (LAS) can help. Taking a loan against your shares means you won’t have to sell your investments, avoid a capital gains tax at that moment, and the interest rate is often lower than an unsecured personal loan.

But LAS is not “easy money”. It is a secured loan tied tightly to market movements, and that changes the risk equation in ways many borrowers underestimate.

What exactly is a loan against shares?

When taking a loan against shares you can borrow money by pledging your listed shares or equity mutual fund units as collateral. The shares remain in your name, and you continue to get dividends or corporate benefits, but the lender has the right to sell them if you are unable to pay off the loan.

These loans are offered by banks, NBFCs and brokers through a pledge mechanism linked to your DEMAT account. The loan amount is usually a percentage of the market value of the pledged securities, known as the loan-to-value (LTV) ratio.

For most equity shares, the LTV is around 40-50 percent. For equity mutual funds, it can go up to 50-60 percent, depending on the fund and the lender.

How the money is disbursed and repaid

Once your shares are pledged, the loan is either disbursed as a lump sum or set up as an overdraft facility. Interest is charged only on the amount you use, not on the full sanctioned limit.

This flexibility makes LAS attractive for short-term needs like business cash flow gaps, bridge financing, or covering an unexpected expense without disturbing long-term investments.

Repayment terms vary. Some lenders expect periodic interest payments with the principal repaid at the end, while others allow partial repayments anytime.

The real risk: Market movements

This is where loans against shares differ sharply from most other loans.

If the market falls and the value of your pledged shares drops, your LTV shoots up automatically. When it crosses the lender’s comfort level, you get a margin call. That means you must either add more shares, bring in cash, or repay part of the loan.

If you don’t act quickly, the lender has the right to sell your shares to recover the loan, often at precisely the wrong time from an investor’s perspective.

This forced selling risk is the single biggest drawback of LAS.

Costs you should look beyond interest rates

Interest rates on LAS are usually lower than personal loans, but they are not the only cost. There may be pledge charges, renewal fees, and penal interest if margins are breached.

Also, because the loan is linked to volatile assets, the “mental cost” of constantly tracking markets is real. A sharp correction can turn a calm borrowing decision into a stressful one overnight.

When a loan against shares makes sense

LAS works best when the borrowing need is short-term and predictable, and when the pledged portfolio is diversified and not excessively volatile.

It can also make sense if selling your shares would trigger a large capital gains tax or disrupt a long-term investment plan, and you are confident you can repay or reduce the loan quickly.

Business owners and self-employed professionals often use LAS as a temporary liquidity tool rather than a long-term borrowing solution.

When you should avoid it

If your income is uncertain, your shares are concentrated in a few stocks, or you are already uncomfortable with market volatility, LAS can amplify stress.

It is also a poor choice for long-term consumption spending. Using volatile assets to fund lifestyle expenses over many years increases the risk of forced liquidation.

If you cannot meet a margin call without selling the same shares you pledged, the structure is already too risky.

The bottom line

A loan against shares is not inherently good or bad. It is a sharp financial tool that works well in specific situations and cuts badly in others.

Used thoughtfully, it can provide low-cost liquidity without derailing your investment journey. Used casually, it can push you into selling quality assets at the worst possible time.

Before taking one, ask yourself not just whether the interest rate is attractive, but whether you are prepared for what happens if markets move against you.