Loans against mutual funds: Is it better than personal loans?

Loans against mutual funds: Is it better than personal loans?

Borrowers are always looking at better ways of getting loans in hopes of avoiding higher interest rates and saving on money.

Among these alternatives, loans secured against mutual funds are gaining attention. Offering lower interest rates and simplified processes, these loans present a compelling alternative to traditional personal loans.Â

The key difference lies in the interest rates, as loans backed by mutual funds typically come with lower interest rates due to the collateral provided by the investments.

This means that lenders have security, reducing the risk and thereby lowering the interest rates for borrowers.

Atul Garg, the Founder of FinEzzy, explained that loans against mutual funds offer investors the advantage of continuing to earn returns on their investments while accessing the liquidity they need.Â

“Securing a loan against a mutual fund presents a strategic advantage through significantly lower interest rates compared to personal loans. The underlying reason is that loans backed by investments are considered secured, providing lenders with collateral. A standout benefit of this approach is the ability for investors to continue accruing returns on their investments throughout the loan period. Although lenders reserve the right to liquidate the mutual funds or stocks in the event of a default,” said Garg

One of the notable advantages of opting for a loan against mutual funds is the simplified process. Unlike personal loans, which often require extensive documentation and a good credit score, loans against mutual funds typically require minimal paperwork and no credit score checks.

“The process for obtaining a loan against mutual funds is streamlined and less cumbersome, requiring fewer documentation and no credit score, unlike what is typically demanded for personal loans,” said Garg.Â

This accessibility makes them a viable option for a wider range of borrowers, including those with lower credit scores.

Moreover, Loans Against Mutual Funds (LAMFs) provide borrowers with flexibility in repayment terms. They can easily adjust their repayment schedules or even borrow additional amounts if needed, offering a level of adaptability not commonly found in personal loans.

On the other hand, personal loans come with set terms that borrowers must adhere to, limiting their flexibility, especially in the face of unexpected financial changes.

Interest rates also play a crucial role in determining the affordability of loans. Personal loans often come with higher interest rates, which can range from 12% to 26% per annum, depending on the borrower’s credit score.

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