The usage of these units as collateral assumes significance, since borrowers for unsecured personal loan or loan against gold/ properties more often ignore clauses pertaining to pre-payment charges and fore-closure charges which are not applicable to loan against shares or mutual fund units.
With the best credit score for personal loan starting at 12-13% and rises as the credit score drops, amid several other parameters like occupation and organization contributing to further rise in interest rates, foreclosure charges in the range of 1% of sanction loan value further adds to the agony.
Moreover, borrowers of personal loans and loans against gold/ properties have to pay the monthly installment (principal + interest) whereas for loans against shares or mutual fund units, the borrower only has to pay an interest amount and the principal can be repaid anytime during the tenure of the loan.
Apart from foreclosure charges, the other key factor is the processing fee of around 1% that also acts as a deterrent keeping the short-term tenure in mind.
For those servicing their credit card repayment, interest is too high in the range of over 40% per annum after crossing the free period. If the duration of funds required is over and above the free period, the borrowing against a credit card is not an ideal choice.
Gold loans though being a secured loan have a higher interest rate often in the range of 11% to 16 %. The interest also goes as high as 20% in some cases. Overall time to avail gold loan is also higher since this involves pledging of physical gold and branch visits. With loan against mutual funds and shares the same can be availed as an overdraft facility in 15 minutes and same day respectively. Loans against property, like gold loans, take days for processing and often involve higher processing fees. Interest rates are affected by tenure of loan, shorter the tenure higher the interest rate, credit score, type of property, applicant profile (age, income, occupation, etc)
These constraints of high interest rates, foreclosure or high processing charges can be overcome by exploring loans against share or mutual fund units which are offered at as low as 9%t per annum without any prepayment, foreclosure charges or any other hidden charges.
Moreover, the borrower is charged interest only for the duration the loan amount is utilized and not on overall sanctioned value.
While loan against shares or mutual funds units has existed in the past, investors have stayed away from availing the same due to the tedious process that involved multiple visits to the branch, fulfilling KYC norms, and waiting for days to get the loan sanctioned and disbursed. And it was all the more time consuming to get the pledged shares or units revoked after repayment.
All that is now history. Speed and convenience in the digital era has now ensured that one can get a loan against mutual fund units in 15 minutes, using an app while loan against shares can be approved on the same day.
Despite being location agnostic, the end-to-end digital process allows borrowers to complete the process in six steps using the app. Not just the application process but the entire services of withdrawal, repayments, top-up, security withdrawals, loan closure, etc. can be done digitally in an instant without having to visit branches or wait for days.
Through the overdraft facility, the borrower can withdraw the required amount and repay as per his or her convenience without any prepayment charges. The interest is charged only on the amount utilized and for the duration, it is utilized. If no amount is withdrawn, then no interest is charged. It’s a great tool to have emergency funds available on tap of your phone while your long-term investments grow.
To conclude, loan against mutual fund units and shares is economical and provides greater repayment flexibility compared to unsecured personal loans, gold loans, loans against properties and credit cards.
Krishna Kanhaiya is Director & Chief Executive Officer (CEO) at Mirae Asset Financial Services (India).
