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Loans Against Mutual Funds vs. Personal Loans

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Last edited by

Rupali Amin

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October 9, 2023

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Created on

October 6, 2023

When financial needs arise, two commonly considered options are Loans Against Mutual Funds (LAMF) and Personal Loans.

In this blog, we explore the Let’s check out the differences, advantages, and drawbacks of loans against mutual funds as well as personal loansthese financial instruments to help you make an informed borrowing decision. Let’s get started!

What is a Loan Against Mutual Funds?

LAMF is a financial product where you pledge your mutual fund units as collateral to secure a loan from a bank or financial institution. It allows you to access funds while keeping your investments intact.

What is a Personal Loan?

A Personal Loan is an unsecured loan that you can obtain from banks, credit unions, or online lenders. Unlike LAMF, it doesn't require collateral, but it's typically based on your creditworthiness and income.

Pros and Cons: Loans Against Mutual Funds vs. Personal Loans

Loans Against Mutual Funds
Pros	Cons
LAMF often offers lower interest rates compared to unsecured Personal Loans due to the collateral involved.	If you fail to repay, the lender can liquidate your mutual fund units to recover the outstanding amount.
Your mutual fund investments continue to grow, and you benefit from any potential market gains.	The loan amount is usually a percentage of the mutual fund's NAV, which can be lower than your immediate financial needs.
The process is typically faster, with reduced paperwork since it's a secured loan.
Personal Loans
Pros	Cons
You don't need to pledge assets, making it accessible to a wider range of borrowers.	Personal Loans usually come with higher interest rates compared to secured loans like LAMF.
Personal Loans can be used for various purposes, from debt consolidation to travel expenses.	Mismanagement of Personal Loans can negatively impact your credit score.
Personal Loans can often provide higher loan amounts, suitable for substantial expenses.

Comparative Analysis: Loans Against Mutual Funds vs. Personal Loans

Here are some of the main differences between a loan against mutual fund and personal loan across some key factors:

Aspect	Loans Against Mutual Funds (LAMF)	Personal Loans
Eligibility Criteria	Mutual fund units, credit score, income	Credit score, income, repayment capacity
Loan-to-Value (LTV) Ratio	Depends on mutual fund's NAV, typically lower	More flexible, higher loan amounts depending on financial profile
Interest Rates	Generally lower due to collateral	Typically higher, as these loans are unsecured
Tax Implications	Generally none	Personal Loan interest is not tax-deductible
Repayment Process	Usually through EMIs, with the risk of asset liquidation if not paid	Repayment in EMIs without the risk of asset liquidation

In Conclusion

Both Loans Against Mutual Funds and Personal Loans offer financial flexibility, but they cater to different needs and come with distinct advantages and drawbacks. Your choice should align with your financial goals, creditworthiness, and ability to manage repayments.

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Frequently Asked Questions

1. How does the eligibility criteria for Loan Against Mutual Funds compare to Personal Loans?

The eligibility criteria for LAMF depends on the type of mutual fund, the number of mutual fund units you own, your credit score, and annual income. For personal loans, eligibility factors include credit score, income, and repayment capacity.

2. What is the loan-to-value (LTV) ratio for Loan Against Mutual Funds vs. Personal Loans?

The LTV ratio depends on the mutual fund's NAV, usually offering a lower percentage of the NAV as the loan amount. Usually, personal Loans can provide higher, more flexible loan amounts depending on your financial profile.

3. What are the interest rates typically associated with Loan Against Mutual Funds and Personal Loans?

LAMF generally offers lower interest rates due to the collateral involved, as compared to personal loans that are unsecured.

4. Are there any tax implications or benefits for Loan Against Mutual Funds and Personal Loans?

Generally, there are no tax implications (benefits or liabilities) when you take a loan against mutual funds or a personal loan.

5. How does the repayment process differ between these two types of loans?

LAMF repayment is usually done via EMIs, and if not paid, the mutual fund units may be liquidated. There is no asset liquidation involved in personal loans.

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