Traditional Loans vs Mutual Fund Loans - What to Choose?
Financial needs can arise at any point in life.
And most uncalled financial needs can put a dent into your budget.
Whether it’s a medical emergency, a dream vacation, or unexpected expenses, it’s almost a no-brainer to keep yourself prepared for every financial requirement.
This is where traditional loans provided by financial institutions such as credit unions and banks come in.
They’ve been around for a while and have some important features that make them a great option for most individuals in unforeseen circumstances.
But are traditional loans truly the best option?
Well, there could be a few better options as well – something as specific as mutual fund loans.
So how much potential do these types of loans have?
Let’s find out.
The Significance of Traditional Loans
Traditional loans are loans where an individual borrows X amount of money from a bank or a financial institution and agrees to pay it back over some time… usually with a fixed interest rate.
Most people choose these loans because they are simple and easy to manage.
Moreover, you are not restricted to a single bank. You can find the best bank with the lowest interest rates and prolong the repayment time.
Types of Traditional Loans
As we have already discussed Traditional Loans, let’s give you a well-rounded picture of different types of traditional Loans.
Here are some of the most popular types of traditional loans:
- Personal Loans: A personal loan is an unsecured loan given by financial institutions such as banks, online lenders, or credit unions. You can get a loan for a number of personal expenses such as house repair, consolidation financial debt, and other unanticipated expenses with a defined repayment time and interest rate.
- Auto Loans: This loan allows the individual to buy a new set of wheels. No matter whether you want to go for a new one or a pre-owned one. These are typically secured loans and the vehicle itself serves as collateral against the loan. In case the borrower fails to repay the amount to the bank, the bank has the right to repossess the vehicle against the losses.
- Business Loans: These loans are used to help small business owners expand their business operations, and purchase inventory, and other things that they cannot buy with the assets they have on hand.
- Education Loan: This type of loan gives you a pre-determined sum of money, usually laid by the institution, to pay for your school or college-related costs to obtain a college degree.
- Credit Cards: Credit cards aren’t exactly considered traditional loans. However, they are still somewhat similar. You can still borrow money up to a specific limit and pay it back gradually. It is important to note that interest rates on credit cards often range from 8% to 48% depending on the bank. However, it is advised to use them wisely.
- Government Loans: A government loan is a type of loan that involves a partial government guarantee. This will eventually reduce the risk for lenders and allow the borrowers, who might not otherwise be eligible for traditional loans from banks or credit unions.
Key Features of a Traditional Loan
- Eligibility Criteria: Compared to a lot of alternative lenders, traditional lenders have slightly more strict eligibility requirements. This might make it difficult for individuals with no credit history or lower income to qualify for a loan.
- Repayment Terms: Traditional loans usually come with a long repayment term. Non-traditional sources provide short-term loans that need to be paid back within 6-18 months. On the other hand, traditional loans give you a repayment period ranging from 1-25 years.
- Collateral Requirements: Traditional loans often include collateral, to mitigate the risk to the lender. The collateral is something that you will have to give away if you have missed the loan payment.
Advantages and Disadvantages of Traditional Loan
Let’s dig into this in detail and learn the pros and cons of traditional Loans. It’s imperative to understand each aspect to make an informed financial decision.
Advantages | Disadvantages |
Ease of availability of loans through established financial institutions | Traditional loans have strict eligibility criteria to borrow loans from banks and credit unions. |
With traditional loans, you can have the flexibility to repay loans for longer periods. | It may require collateral such as a house or a car. In case you fail to pay the loan, the bank has the right to possess your assets. |
It comes with various options such as personal loans, auto loans, mortgages, etc. | It is a typical long process to approve the loan amount. |
It offers higher loan amounts than alternative sources. | These loans consist of different types of fees, thus maximizing the cost of the loan amount. |
It helps in maintaining a positive relationship with the lender and maximizes the chance of future loan approvals. | Individuals with low credit scores have fewer chances of getting a loan and are limited in accessibility. |
What are Mutual Fund Loans?
Mutual funds are the type of investments that collect money from different investors to invest in a diverse portfolio of stocks, bonds, or securities.
This helps in reducing the risk as it spreads out in different bonds or shares.
Mutual Fund loans allow individuals to borrow money with the help of mutual fund investments as collateral.
This means that you can have the opportunity to obtain the cash you require without selling your mutual funds shares.
Key Considerations
- You can easily get a mutual fund loan if your portfolio is above a certain limit as required by the lender.
- After you pledge your portfolio, you can’t access your mutual fund investments until the loan is paid off completely.
- The interest rate entirely depends on the platform and often ranges from 9% to 15% per annum.
Advantages and Disadvantages of Mutual Fund Loan
Advantages | Disadvantages |
|---|---|
Mutual Fund Loans allow your investment to grow without selling the Mutual Fund holdings. | It comes with a Market risk. Decreasing the value of mutual funds also decreases the value of collateral. |
Mutual Fund loans have comparatively lower interest rates. | Failing to pay the loan may result in the liquidation of your mutual funds to recover the loan amount. |
It comes with the flexibility of repayment options as per your financial situation. | Interest costs can be higher as compared to home loans or personal loans. |
It helps to grow your funds since you are not selling your mutual funds. | Limited access to loan amounts as you can only borrow a fraction of your mutual fund’s value. |
The approval process is fast as compared to the traditional loans. | It may also include some administrative costs and fees, which can add to the total cost of the borrowing |
The Better Option
Here are some of the opinions from the financial experts on traditional loans and mutual fund loans:
Both Traditional loans and Mutual Fund loans offer various advantages as per the requirements and circumstances of an individual. A traditional loan is a good option if you have an excellent credit score and meet all the eligibility criteria. These loans are suitable if you require a significant amount of money such as you buy a house or a car and prefer the stability of fixed monthly payments.
In comparison, Mutual Fund Loans offer a more flexible option. These loans allow you to utilize your mutual fund portfolio as collateral. Mutual fund loans may have a cheaper interest as compared to the standard unsecured loans and offer more flexible repayment choices. However, you must be vigilant of the dangers associated with market volatility, as the value can change depending on the market conditions.
Eventually, “what to choose” and “what is best” entirely depends on individual needs as per their financial circumstances, goals, and willingness to tolerate risks.
Nevertheless, if you are looking for a way to get started, 50Fin allows you to borrow loans against mutual funds.
You don’t need to worry about a higher CIBIL score and a long approval time. With an interest rate of 10.5% p.a. and a 7-minute approval time, 50Fin is available for investors with minimum eligibility of Rs 50,000 portfolio value.
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