How do Digital Loans against Mutual Funds Compare to Traditional Loans against Mutual Funds?

Mutual funds are popular investment options that can help investors grow their wealth. However, there could be situations wherein the investors might need funds urgently, and selling their mutual fund units may not be the best option. 

In such cases, taking a loan on mutual funds can be a good alternative that allows investors to access funds without selling their investments.

Traditionally, such loans were offered by banks and other financial institutions. However, with the rise of digital lending platforms, investors can now avail of loans against their mutual fund investments online. 

In this blog, we will compare digital loans against mutual funds with a traditional loan against MF. 

Traditional Loan against Mutual Funds

A traditional loan is a secured loan that is offered by banks and other financial institutions. In this type of loan, the mutual fund units are pledged as collateral to secure the loan. 

The loan amount that can be availed depends on the value of the mutual fund units pledged as collateral. Typically, the loan amount can be up to 50-60% of the value of the mutual fund units.

The interest rate charged on traditional loans against mutual funds is generally lower than other types of loans, such as personal loans, as the loan is secured. The interest rate can vary from bank to bank and can range from 10% to 14%. The tenure of the loan can range from 1 year to 5 years.

One of the main advantages of traditional loans against mutual funds is that they are offered by established financial institutions, which ensures safety and reliability. Additionally, these loans have a fixed interest rate, which makes it easier for borrowers to plan their finances.

Digital Loan against Mutual Funds

These loans are offered by FinTech companies and digital lending platforms. In this type of loan, mutual fund units are pledged as collateral, similar to traditional loans against mutual funds. 

However, the loan application and approval process is completely online, making it more convenient and faster than traditional loans.

The interest rate charged on digital loans against mutual funds is generally higher than traditional loans, as the lending platform or Fintech Company has to bear higher costs of operations. 

The interest rate can range from 12% to 18%, depending on the lending platform and the borrower’s creditworthiness. The tenure of the loan can range from 1 year to 3 years.

One of the main advantages of digital loans against mutual funds is that the loan application and approval process is completely online, which makes it convenient for borrowers. Additionally, the loan disbursement is faster than traditional loans, as there is no need for physical documentation and verification.

Application and Approval Process

Such a process for digital loans against mutual funds is completely online, which makes it convenient and faster than traditional loans. In traditional loans, the borrower has to visit the bank or financial institution and submit physical documents.

Eligibility criteria

Traditional loans are generally available only to exist customers of banks or financial institutions. The eligibility criteria may also include a minimum credit score, income, and other factors. 

On the other hand, digital loans may have more relaxed eligibility criteria, and some lending platforms may offer loans to borrowers with lower credit scores or income levels.

Loan repayment

In both traditional and digital loans against mutual funds, the loan repayment is usually done through Equated Monthly Installments (EMIs). 

However, the repayment terms may differ, and some digital lending platforms may offer more flexible repayment options, such as early repayment or partial prepayment without penalty.

Fees

While traditional loans may have lower processing fees, they may also have higher pre-payment or late payment fees. On the other hand, digital loans may have higher processing fees, but lower pre-payment or late payment fees.

Credit score

Traditional loans against mutual funds are generally offered to borrowers with good credit scores. However, digital loans may also be available to borrowers with lower credit scores. 

Some digital lending platforms use alternative credit scoring models to evaluate the borrower’s creditworthiness, which may include factors such as social media activity or transaction history.

Risk management

Traditional loans are secured loans, which means that the lender has a legal claim on the collateral in case of default. Digital loans, on the other hand, are unsecured loans, which means that the lender has a higher risk of default. 

However, digital lending platforms use advanced risk management tools and algorithms to evaluate the borrower’s risk profile and offer loans accordingly. This helps them manage their risk and offer loans to a wider range of borrowers.

Bottom Line

In conclusion, digital loans & traditional loans against mutual funds have their own set of advantages and disadvantages. Digital loans are faster, more convenient, and require less paperwork, while traditional loans may offer lower interest rates and more flexibility in terms of repayment. 

It ultimately depends on the individual’s preferences and financial situation to decide which type of loan is best suited for their needs. 

However, with the growing popularity of digital lending platforms, digital loans against mutual funds seem to be a promising alternative to traditional loans against mutual funds.