Loan Against Mutual Fund Units

Loan against Mutual Funds is a common financial service offered by financial service providers. With the growing popularity of loans and stiff competition in the financial market, Banks and NBFCs are coming up with many new ways of lending money to prospective borrowers. Loans against securities is one such way of availing loan; loan against mutual funds units is a subset of the same.

Secured loans can be procured by customers by pledging collateral as security. One of the most unique and comparatively new form of acceptable collateral is mutual fund units. Generally, banks offer loans at lower rates of interest as compared to unsecured loans if mutual fund units are pledged as security.

mutual funds

Loan against Mutual Funds

Major points regarding loans against mutual fund holdings

Some of the basic but significant points that customers need to know about loans that accept mutual fund units as security are listed below.

  • Application for loan against mutual funds should be filed jointly by all the holders of a mutual fund unit.
  • The amount of loan sanctioned by bank or any NBFC is a certain percentage of the net value of the fund units held. In case of equity funds, the margin of loan can be higher than 50% of the mutual fund value
  • A lien is signed by the lender, through which the lender refers to its right to take hold of the property of the borrower and/or sell it in order to recover the loan amount
  • The rate of interest charged by financial institutions on loans against mutual fund units is mostly lower than that charged on unsecured loans
  • The dividends for mutual funds can continue to be paid to the borrower during the lien period however, no units can be sold and redeemed during the loan tenure
  • If the borrower defaults on his or her loan then the lender has the right to sell the mutual fund units and redeem the loan amount

Advantages of availing loan against mutual fund units

 has some major advantages which makes it a good buy for customers looking for a quick loan. Listed below are a few of these benefits.

  • Convenient and immediate channel of credit in order to meet urgent financial expenses
  • Lower rate of interest
  • Interest is charged only on utilized amount of sanctioned loan
  • Corporates can use interest paid on loans against mutual funds, to reduce their tax burden

What is a lien?

A lien is basically the right of the lender to take possession of and/or sell the mutual fund units against which a borrower has availed loan. A lien is used as security to cover the lender in case of loan default by the borrower.

Lien is marked by the registrar of the mutual funds, upon request by the borrower to mark his/her mutual fund units in favor of the lender.

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4 points to consider while taking a personal loan against property

The amount of loan against property right now is valued at Rs.2.5 trillion, and that amount is on its way to becoming Rs.5 trillion by 2019, with a 22% projected growth in the next 4 years.

If you’re planning on taking one of these, here’s four things you should know:

  1. Interest rates and tenures.

loan against property are secured loans. This means you have to mortgage your property with the lender in order to get one, thus considerably reducing the risk level of the bank or NBFC that’s giving it to you. A reduced risk means lower interest rates, of between 9% – 15%, depending on a lot of factors including your current employer, income, CIBIL score and market value of the property pledged. You can have tenures as low as 5 years and up to even 30 years depending on your earning potential, loan amount required, stability and patience.

  1. Loan amount.

    loan against property

    Apply for Loan against Property

Banks and NBFCs typically only give you between 50% – 65% of the market value of your property as a loan. Lenders consider your repaying capacity as the difference between your income and current EMIs, and decide how much you can pay back on a monthly basis after interest and in the tenure you choose. Loans can be sanctioned from Rs.2,00,000 to a few crores depending on your ability to repay and the tenure you want.

Lenders take a sizeable chunk under what’s called a “one-time processing charge” which can range from 0.50% to 5% (in addition to a 14% Service Tax) and can be entirely avoided depending on your negotiating and offer-leveraging skills. Processing charges are sometimes deducted from your sanctioned loan amount. Another common charge is the “prepayment” charge, which is levied if you wish to clear off your loan before the tenure ends. There are also charges in the form of penalties which will be charged if you don’t make payments on time or default on your loan, which vary between lenders but are generally in the range of around 3% – 8%. These penalties hurt you in multiple ways, as they will also negatively impact your CIBIL score. Stamp duties and other charges are levied as per state laws.

  1. Documents required.

When applying for a personal loan against property, you’ll need the following documents:

  • Photo proof of identity.
  • Proof of residence.
  • Proof of income through salary slips (for the last 6 months) or bank statements.
  • Form 16.
  • Income tax returns.
  • Profit and loss account statement (for self-employed persons).

Taking a loan against your property is as dangerous as taking any other kind of loan. If you miss payments and become a defaulter, the bank will take your property and levy crippling charges and penalties on you.

Choose wisely, and ensure you have a regular income and sufficient funds to repay your loan EMIs as and when they become due. Shop around, better deals are around the corner. Try the eligibility calculator and personal loan comparison tool on BankBazaar.com to find the best deal for you.

What is the ideal situation to use personal loan to finance your business?

Though the businessmen can take business loans, they seem to be quite tricky. It is okay for the businessman to use a personal loan to fund his business as it is simple and easy to avail. But, as a businessman must only consider taking a personal loan in the following situations:

  • When you are yet to start a business:

When business is in the ideation stage, it is difficult for a person to obtain business loans. Lenders prefer to offer loans to a business that is functioning and performing and not to just an idea. Though your business idea has a lot of potential and innovative, the lenders only provide loans to those business that have a track record. Therefore, if you have to fund your business at the ideation stage, you must consider taking a personal loan online.

  • When you don’t have a collateral or a guarantor to offer to the bank:

When the banks or lenders offer you a business loan, they require a collateral or a guarantor. If your company is young or if you are in a service sector, then there may be no collateral for you to offer to the lender. Banks require you to have a guarantor who is creditworthy and if you are unable to provide one then the banks will most likely refuse the loan application. It is best that you apply for a personal loan in such cases.

  • When you need a lesser loan amount:personal loan

If the loan that you require is really substantial it is best that you take a personal loan. Business loans work best for a large amount of the loan and also the procedure to avail the loan is longer. Personal loan is hassle free and you can avail it with minimum documentation. If the amount that you require is small, then you can repay it within a smaller timeframe as well.

  • When you don’t want to reveal the purpose of taking the loan:

When you are applying for the business loan, you are required to present the utilization plan for the money. If the bank considers the plan to be sketchy, then he will reject the loan application. When you are applying for a personal loan, the bank is not concerned about how you are utilising the loan. You will not have to have a concrete business plan either.

Though it is easy to get a personal loan, there are times that you must consider to take a business loan. The situations to take a business loans are:

  • If you qualify under Credit Guarantee Scheme:

If you are a micro or a small scale enterprise and you qualify for Credit Guarantee Scheme, then you can opt for the business loan. Under the scheme, you get collateral free loans for up to Rs.1 crore. You can use the money as credit card to meet the working capital requirement or as term loans to purchase commercial assets or to expand your business.

  • If your business has a good credit rating:

If your business is up and running and has been a part of the institutional finance channel, then there is a good chance that your business has a good credit rating. And it is quite easy for you to avail a business loan. Business loans carry lesser interest rates when compared to personal loans and they are given for a longer tenure. If your business has its accounts maintained with a particular bank, then approaching the bank for the loan is a lot easy.

  • If you already have personal loans:

Personal loan is provided to a person based on their personal credit rating, and if you have other existing loans and unpaid credit card dues it becomes difficult for you to avail another personal loan. If your personal debt to income ratio is high, it is advisable for you to take a business loan.