A loan against shares can be an efficient financing tool for investors who want liquidity without selling their equity holdings. However, approval is not guaranteed, and even eligible borrowers may face higher loan against shares interest rate charges if they make avoidable mistakes. Lenders evaluate both the borrower’s financial profile and the quality of the pledged shares before determining loan terms. Understanding the most common errors that affect loan against shares eligibility helps you prepare better and secure more favourable pricing. This article highlights the key mistakes borrowers often make and how to avoid them.
Not maintaining a strong credit profile
Many borrowers assume that since the loan is secured, their credit score does not matter. However, lenders still review repayment history, outstanding obligations, and credit discipline. A weak credit score increases perceived risk and may raise the interest rate or even lead to reduced eligibility. Missed payments, high credit utilisation, and frequent loan inquiries negatively affect approval chances. Maintaining a healthy credit score is crucial for securing competitive terms, whether you are applying for a property loan or even exploring options like a loan against shares.
Pledging highly volatile or ineligible shares
One of the biggest factors influencing both eligibility and interest rates is the nature of the pledged shares. Lenders maintain approved lists of securities and may reject shares that are too volatile, illiquid, or belong to companies with inconsistent performance. Even if accepted, such shares may attract higher interest rates due to increased risk. Borrowers who do not check eligibility lists in advance may face delays or reduced loan amounts. Choosing stable, liquid shares improves approval chances and helps secure better pricing.
Overestimating the loan-to-value ratio
Borrowers sometimes assume they can borrow a large percentage of their share value without considering the lender’s LTV policies. Loan-to-value ratios vary based on share type, market conditions, and lender risk appetite. Higher LTV requests often result in higher interest rates or stricter conditions. Some shares may qualify for only fifty to sixty per cent LTV. Not aligning expectations with lender guidelines can weaken negotiation and approval outcomes.
Ignoring market volatility and timing
Market conditions affect share prices, and sudden fluctuations can impact both eligibility and loan terms. Applying during a volatile period may lead lenders to tighten risk controls, reduce loan amounts, or increase interest rates. Borrowers who overlook market timing may receive less favourable terms. Monitoring market stability before applying improves the likelihood of securing affordable rates and smoother approval.
Inadequate documentation or incomplete KYC
Incomplete documentation is a frequent cause of delayed approvals. Lenders require identity proof, address proof, demat account statements, income records, and financial details. Incomplete or outdated KYC information is one of the most common reasons applications get stalled. Borrowers who prepare documents in advance experience faster processing and a lower likelihood of eligibility-related issues.
Failing to diversify collateral
Relying on a single high-volatility stock to secure the loan is a major mistake. Lenders prefer diversified collateral that spreads risk across different companies and sectors. A portfolio concentrated in one stock increases the risk of sharp value drops, leading to lower eligibility and potentially higher interest rates. Borrowers with diversified portfolios generally receive better loan terms because the collateral is more stable.
Ignoring lender-specific eligibility requirements
Each lender has unique rules regarding minimum holdings, approved securities, loan amounts, and borrower qualifications. Not reviewing these requirements beforehand can lead to rejection or unfavourable terms. Some lenders may require a demat account with them, while others accept external holdings. Borrowers should compare eligibility norms to avoid last-minute surprises.
Borrowing more than necessary
Overborrowing increases not only the outstanding principal but also the interest burden. Borrowers who request the maximum amount available often face higher interest rates due to increased lender exposure. Assessing actual liquidity needs can help you borrow more strategically, keeping both risk and interest charges lower.
Not monitoring demat account activity
Lenders continuously evaluate the pledged shares during the loan tenure. Any unauthorised transfer, demat inactivity, or discrepancy in pledged securities can affect eligibility and trigger lender intervention. Borrowers who do not track their demat account may face compliance issues or even margin calls. Maintaining transparency ensures smooth loan management.
Failing to respond to margin calls promptly
When share values fall below a certain threshold, lenders issue margin calls requesting additional funds or collateral. Ignoring these calls can lead to higher interest charges, forced liquidation of shares, or eligibility reassessment. Borrowers who respond promptly maintain greater control over the loan and avoid penalties.
Not comparing lenders before applying
Borrowers sometimes approach the first lender they encounter without comparing interest rates, processing fees, LTV ratios, and eligibility norms. This oversight can lead to unnecessarily high borrowing costs. Comparing multiple lenders helps identify better interest structures and eligibility terms that align with your financial profile.
Misunderstanding interest calculation methods
Some borrowers overlook whether interest is charged on a reducing balance, a fixed rate, or on the utilised overdraft amount. Misunderstanding these methods may lead to incorrect cost expectations. Clarifying how the loan against shares interest rate is calculated helps prevent confusion and supports better financial planning.
Neglecting income stability requirements
Even though the loan is secured, lenders still assess repayment capacity. Borrowers with inconsistent income or insufficient documentation may face higher rates or reduced eligibility. Stable income improves lender confidence and may qualify borrowers for better loan pricing.
Final thoughts
A loan against shares is a powerful financing option, but approval and pricing depend heavily on how well borrowers meet eligibility requirements and manage risks. Mistakes such as pledging ineligible shares, ignoring documentation, or overlooking credit health can lead to higher loan against shares interest rate charges. By understanding lender expectations, preparing documents carefully, monitoring market behaviour, and maintaining financial discipline, borrowers can significantly improve eligibility and secure more favourable terms.