Thinking of selling your shares to cover up a financial emergency? When talking about selling shares, there is no perfect time to sell them. It is all about how it fits into your investment goals and portfolio.
The pathbreaking loan against shares also helps to instantly raise money without selling shares. For loans, we think for days over them, judge their pros and cons, and then apply for them. But is there genuine advice from friends, relatives, or colleagues? More often, we end up making impulsive loan decisions when we get convinced of the advantages. When it has become a norm to take personal loans, people are still unaware of loans against securities that include shares and mutual funds.
This article lists all the pros and cons of selling shares vs getting a loan against shares. This will help you to make informed decisions while considering the same for your stocks.
Buying shares is exciting but there comes a time when you will have to sell them. Here are the pros of cons of selling shares:
Pros of selling shares:
- Quick Money: Selling shares can give quick money that can be used to accomplish other financial goals. It could be funding a medical emergency, investing in other funds, or clearing a debt.
Cons of selling shares:
- Losing shares: when you sell the shares, you immediately lose your authority over them. This means even if the market has an opportune moment to seek the shares for a profit later, you can't do it.
- Losing dividends: You lose out on the share of profits and retained earnings by the company after selling shares.
- Losing growth (CAGR): By selling shares, you will lose out on the opportunity for growth of your stocks or mutual fund units.
- Tax Libility: The gains in shares apply to LTCG (income)/ STCG tax. If you have a GIA (general investment account), you have to pay tax on the gains that breach the thresholds within a tax year.
- Could be a Loss-making deal: When the market is down, selling Shares can be a loss-making deal. The only thing here is that you don't need to pay tax as you haven't made any capital gain.
Loan Against Shares/ Stocks
When you have accumulated a certain amount of wealth, different investment strategies and financial planning start making sense, isn't it? But debt is not good, right? Well, this statement is not always true!
Loans are a good way to finance your desires. A loan against shares is a good way to get financial aid without losing your financial assets.
Pros Of Loan Against Shares:
If you have shares in your account and are still worrying about meeting your expenses, you need to explore the potential of your shares.
- Quick Money: Loans give fast money without depending on the performance of the stocks in the market. While taking a loan, you don't lose out entirely on your shares which means no losing shares, dividends, and CAGR. You just cannot use it for any purpose when it is with the bank.
- No specific purpose: The loans which are offered for this purpose do not ask you the purpose of the loan for its approval, similar to the case of a personal loan. This means you can use the amount to settle a debt, buy a house or finance a medical emergency.
- No prepayment charge: The majority of the tenders that offer loans against shares keep the minimum tenure for one year. This can be extended by paying a certain amount. As the tenure is already low, the lenders do not charge the applicants for prepayment.
Cons Of Loan Against Shares:
- Paying interest: If you have been looking for or interested in loans in recent times, you must be knowing how vital the rate of interest is. It is basically a sum of which the lender charges you for the loan on a yearly basis. The rates of interest for secured and unsecured loans are different. Almost all the PSUs and private banks have loan provisions for shares with the interest starting from 8% to as high as 15%. Banks need repayment and interest yearly until the loan is fully repaid.
- Paperwork : Every loan from a bank comes with a little paperwork which might get hectic at times when you need money instantly without much hassle.
- Loan to value: This is one of the biggest disappointments that people face while taking a loan against shares. While applying for a loan, the lender might evaluate the number of shares pledged by you. However, you might receive less amount sanctioned in your bank account that the stock valuation. This is because the lender offers around 60-80% of the collateral's value. You will never be offered 100% value of the collateral.
- Annual Portfolio Review Fee: Most lenders charge a small amount in order to review equity portfolio valuation on yearly basis. If any reason, portfolio valuation is reduced, lenders can ask for advance payment of dues. The fee is typically from Rs. 500 to Rs. 2000. It can vary from bank to bank.
When Is Loan Against Shares Beneficial?
The loan against shares is beneficial in the following conditions:
- Loan against shared is beneficial for higher income/tax-paying groups. While selling shares, you will have to pay extra tax on the gains. With a loan, you will be exempted from these taxes. Moreover, you will not be taxed on the loan amount that you can use to diversify your portfolio or use it for other purposes.
- There can be times when you need emergency money but don't want to lose out on your shared investment. In such a case, a loan against shares will assist you financially while holding your shares.
When Is Loan Against Shares Not Beneficial?
When a loan against shares is not beneficial:
- Not beneficial for lower-income/tax-paying groups. The loan comes with its own set of prerequisites. You need to pay the interest on the loan which is not very less. Also, the loan is never 100% of the value of the shares. Hence, the overall benefit is not very striking. Thus, it would be better for the lower income group to sell the shares and pay tax on the gains which are not huge as compared to the interest on the loan.
- During the evaluation of the database of the applicant, the bank often keeps a check on the name of the company whose stock is being pledged. Banks give loans against some selected shares (Top 200/300 shares). Having shares of small-cap companies might not be beneficial for taking loans. If the company doesn't have it on the tender list, your loan application will not be approved. Hence, it is important to check the list before applying for a loan against shares.
Selling Shares Vs Loan Against Shares
Let's compare selling shares vs loans against shares with a few numbers. Here are some scenarios:
Individual's tax slab: 20%
Selling shares of 1 Lakh INR (Assuming Mr. X selling his shares from profit)
||(20%) 20,000 INR
||(10%) 10,000 INR
|Effective Capital Gain
Individual's tax slab: 10%, 20%, 30% (Noting matters in this case)
Loan against shares of 1 Lakh INR (Assuming Mr. X takes loan against his shares)
|Loan Against Shares
|Applicable Interest (Approx 12% P/A)
||(12%) 12,000 INR
We didn’t consider dividends and growth of shares. Let’s include these with one example:
|Loan Against Shares
||(12%) 12,000 INR
|Dividend Received (Approx. 2%)
|Growth (Approx. 12%)
|Net Interest Paid
||-2,000 INR (No effective interest)
Well, is taking a loan for shares a good step? It is believed that it is important to understand the purpose of a loan and the cost of the loan before opting for it. Loans against shares have their own set of advantages. People take it to use as a leverage mechanism which they invest back in the market.
When talking about the drawbacks, when the marker falls, the person must have the ability to repay it to the bank. That's why it is important to analyze your ability to repay and then take such steps.
Loans against shares are a viable option for short-term liquidity. But you should regularly have an eye on the amount used. After all, no one wants to lose the profit on the bourses and fall into a debt trap. It is worthwhile to do plenty of research before taking a loan or selling your shares. Make sure you are deciding in the favour of your investment portfolio.