Investors invest in mutual funds to generate funds for various purposes, such as purchasing a house, a dream vehicle, or the children’s higher education. An alternative method of achieving these personal goals is to take out a loan customized for the purpose. These days, there are specific loans for cars, homes, and medical emergencies. As a result of the no collateral requirement, quick access to funds, easy liquidity, and easy application, personal loans have gained popularity over time. In addition to these, you can also take out a loan against a mutual fund. The loans are obtained against mutual fund investments the borrower has already made. Here, we explore the factors to consider when choosing between a personal loan and a loan against a mutual fund.
How to decide between a personal loan and a loan against a mutual fund?
One needs to weigh some factors when deciding whether a personal loan or a loan against mutual funds is best for them.
One of the most significant differences between a personal loan and a loan against mutual funds is the need for collateral for approval of the loan. One main reason for the popularity of personal loans is that an individual need not pledge any assets. One must, however, provide collateral when applying for a loan against a mutual fund, making the loan application process more lengthy and tedious.
There are many factors that influence the amount of the loan against mutual funds, including the size of the portfolio, the type of mutual funds, the bank from which the loan is taken, etc. Some banks may not offer this facility. Additionally, an individual can only borrow a specific maximum amount against their mutual fund investments. With a personal loan, however, individuals can apply for any amount of money they need. To get approval from the banks or financial institutions, one only requires a good credit score and a detailed repayment plan.
In deciding between the two types of loans, this is a major consideration. Loans against mutual funds have a lower interest rate than personal loans. Due to the fact that there is no collateral and personal loans are based on income, the lenders have no choice but to charge high interest rates. Meanwhile, for a loan against a mutual fund, the interest rate varies between 10-12 %, a personal loan interest rate goes up to 15-20%.
It is well known that loans have a direct impact on credit scores. Defaulting on repayment will hurt the borrower’s credit score in both cases. However, in a loan against a mutual fund, in addition to the negative impact on credit ratings, the banks will sell the mutual funds held as collateral to recover their money. Furthermore, since mutual funds remain invested despite the fact that a borrower takes a loan against them, they are subject to market risk.
Increase in investment value
Whenever a borrower takes out a personal loan, it is simply a debt. The borrower does not receive any return on loan. In the case of loans against mutual funds, however, the mutual funds remain invested until the borrower defaults on repayment. Thus, the borrower gets both the loan and return benefits from it.
Having read the above article, you will be able to make an informed decision. when choosing between personal loans and loans against mutual funds. Each has its pros and cons, so thorough research is necessary before deciding. Borrowers can use a personal loan EMI calculator as well as consult a financial advisor for better loan planning