The role of credit score in loan against mutual funds and shares

The role of credit score in loan against mutual funds and shares

A credit score is a very important factor in getting loans in India. Banks and financial institutions use credit scores to evaluate the creditworthiness of borrowers and assess the risk of default. A good credit score can help borrowers get lower interest rates and better loan terms, while a poor credit score can lead to loan rejection or higher interest rates.

In India, credit scores are calculated by credit bureaus such as CIBIL, Experian, and Equifax based on credit history and repayment behavior. It is recommended that borrowers maintain a credit score of at least 750 to increase their chances of getting a loan at favorable terms either as non-collateral or collateral as a loan against shares and mutual funds with a low credit score.

Credit Score for Loans against shares and Mutual funds

Despite that many conventional financial institutions and NBFCs like Abhi Loans offer the loan against shares and mutual funds, for borrowers with low credit scores, the process could be complex as per the credit risk analysis and the creditworthiness of borrowers, and as the chances of a higher risk of default is an impediment.

If someone has a low credit score, they may be rejected for a loan or may be offered a loan at a higher interest rate, which can increase the cost of borrowing. In some cases, borrowers might require a loan against mutual funds and share credit score eligibility accordingly and may need to provide collateral or a guarantor to get a loan.

NBFCs like Abhi Loans extend a loan against shares and mutual funds with a low credit score or loan against mutual funds and shares without a credit score, however, this is strictly subject to eligibility as per their internal credit issue terms and conditions.

The role of credit score in loan against mutual funds and shares

Be it a loan against mutual funds, or any other form of borrowing – the credit score of the borrower plays a significant role in determining their eligibility and the terms of the loan. A higher credit score generally leads to a lower interest rate and a higher loan amount, while a lower credit score can result in a higher interest rate and a lower loan amount or even loan rejection.

Lenders use the credit score to assess the borrower’s creditworthiness, which is their ability to repay the loan on time. Specific to the case of the loan against shares or mutual funds, the other critical factor of assessment is the liquidity and the mutual fund portfolio values, disburse loans against shares or mutual funds.

Why and is the loan against shares or mutual funds with low credit scores, for borrowers’ better choice?

Loans against shares or mutual funds can be a better option for borrowers as the processing time for such loans are quicker and even for borrowers with low credit scores as these loans are secured by the borrower’s investments, which serve as collateral.

As such loans are issued in lien of collateral, lending institutions are willing to extend a loan to a borrower despite their lower credit score than they would for an unsecured loan. Additionally, loans against shares or mutual funds often have lower interest rates compared to unsecured personal loans, which can make them a more affordable option for borrowers with low credit scores. However, it is important to note that in the event of default, the lender has the right to sell the pledged securities to recover the outstanding loan amount, which can result in the loss of the underlying assets. Fundamentally, ownership rights in the mutual fund units are unaffected by borrowing against mutual funds. Only if you don’t pay off your loan on time would the bank sell them.

When a borrower applies for a loan against mutual funds or shares, the lender evaluates the value of the securities and the associated risk. If the value of the securities is sufficient to cover the loan amount and the associated interest, and the borrower meets other eligibility criteria such as income and employment status, the loan may be approved even if the borrower does not have a credit score.

Nevertheless, it is important to note that lenders may still check the credit history of the borrower to evaluate their repayment behavior and creditworthiness, even if they do not rely solely on the credit score to make the lending decision. 

Borrowers can consider the scope of availing such loans in terms of loans against mutual funds if they have a low credit score, and the other important aspect is to have well-structured repayment plans in place for such loans. Such prompt repayments can increase the credit score and can build the credit value for the borrowers.