Using Credit Card v/s Loan Against Mutual Funds: Which is a Better Credit Option?

Ever found yourself in a financial crunch and thought of using your credit card limit?  

Life often throws unexpected challenges our way, and sometimes, these challenges come with a price tag. Whether it’s an unforeseen medical emergency, a sudden home repair, or an irresistible business opportunity, the need for immediate funds can arise at any moment. In such situations, many of us might think of leveraging our credit cards. While you might or might not know credit cards charge interest around 2-3% per month, that’s a whopping 36% annually. But what if I told you there is another low-interest option available

A Loan Against Mutual Fund (LAMF) lets you pledge your mutual fund units to secure a loan, offering a way to get liquidity without selling off your investments. Particularly, the loan against mutual fund low interest rate makes LAMF an attractive option

While the options seem tempting, it’s crucial to understand their implications. Choosing the right credit option can make a significant difference in how you manage your finances and future savings. This article aims to shed light on these two credit avenues, helping you make an informed and wise decision when the need arises.

 

Understanding the Basics 

 

What is a Loan on Credit Card or Credit Limit? 

A loan on a credit card allows you to borrow money up to a certain limit set by your bank. This limit is based on your credit score. You’ll need to pay back this borrowed amount with interest over time. This type of loan can be useful when you need money quickly without going through lengthy loan approval processes. 

What is Loan Against Mutual Fund (LAMF)? 

Loan Against Mutual Fund, or LAMF, is a loan you can get by offering your mutual funds as security to the Financial Institution. Instead of selling your mutual funds, you’re pledging them as a guarantee that you’ll pay back the loan. Once you repay the loan, your mutual funds are fully yours again.

 
Let’ Talk About Advantages and Disadvantages 

 

Benefits of Loan on Credit Card: 

• Immediate Access to Funds: One of the best things about a credit card loan? The speed! When you need money, you can get it almost instantly. No waiting, no long forms, just quick cash when you need it.
   
• No Need for Collateral: Here’s the beauty of it – you don’t have to promise the bank any of your belongings. Your credit card alone does the job. It’s hassle-free and straightforward.
   
• Flexibility in Repayment: Life’s unpredictable, and sometimes, paying back money can be a challenge. But with credit card loans, you’ve got options. Whether you want to pay a little now and more later or spread it out over time, the choice is yours. 

 

Drawbacks of Loan on Credit Card: 

• Higher Interest Rates: While credit card loans are convenient, they come at a cost. The interest can add up, making you pay more than you borrowed. It’s essential to keep this in mind and plan accordingly.
   
• Risk of More Debt: It’s easy to see a credit card loan as ‘extra money.’ But remember, it’s a loan, not a gift. If you’re not careful with spending and repaying, the debt can grow, making things tough in the long run. Always borrow wisely! 

 

Benefits of Loan Against Mutual Fund: 

• Lower Interest Rates: Another significant advantage is the loan against mutual fund with low interest rate. It’s often much kinder on your wallet than credit card loans. So, you end up saving money in the long run.
   
• Growth Potential: Here’s a fantastic feature – even though you’ve taken a loan against your mutual funds, they don’t just sit idle. They keep working for you, growing and increasing in value.
   
• Flexible Loan Amount: Need a big loan? Or just a small one? With Loan Against Mutual Fund, the amount you can borrow is linked to the value of your funds. So, if your funds are doing well, you could get a pretty generous loan amount.                    Ever wondered about the  perks of taking a loan against Mutual Funds? Want to know more? Read our blog for a comprehensive guide on the Benefits of Taking a Loan against Mutual Funds.

 

Drawbacks of Loan Against Mutual Fund: 

• Risk of Losing Mutual Funds: This is something to be cautious about. If, for some reason, you can’t pay back the loan, the bank has the right to sell your mutual funds. It’s a way for them to get their money back.
   
• Restrictions: While Loan Against Mutual Fund sounds great, it’s not a free-for-all. There are rules. Not every mutual fund you own can be used for a loan. Plus, sometimes, there’s a set minimum amount you need to have to get the loan. 

While both credit options have their pros and cons, when you compare the benefits of Loan Against Mutual Fund against its drawbacks, it often emerges as a more favorable choice, especially for those looking for lower interest rates and continued investment growth. 

 

Factors to Consider: 

• Interest Rates: While credit cards offer quick cash, they often come with higher interest rates. On the other hand, loans against mutual funds usually have friendlier rates, making them lighter on your pocket in the long run.
   
• Repayment Terms: Credit card loans might give you flexibility, but remember, the longer you take to repay, the more interest piles up. Loans against mutual funds often offer clearer and more structured repayment plans.
   
• Potential Risks: With a credit card, there’s always the danger of falling into a debt trap if not managed well. But with mutual funds, the main risk is losing your investment if you can’t repay the loan. 

 

Duration of the Loan: 

• Short-term vs. Long-term Needs: If you need money just for a short while, a credit card might seem handy. But for bigger dreams that need bigger funds for longer, leaning on your mutual funds might be the smarter choice.
   
• Financial Health: It’s always good to take a step back and look at where you stand money-wise. Can you handle more debt? Or is it better to use your investments?
  And remember, borrowing more than you can handle is never a good idea. It’s essential to stay within limits and make choices that won’t weigh you down later. 

When you lay out all these points, tapping into mutual fund investments often shines as the more thoughtful and economical choice, especially for those who prioritize saving in the long run.

At FinEzzy, we believe in empowering you with knowledge to make the best financial decisions. With FinEzzy by your side, you’re always one step closer to financial wisdom. Make informed choices and let your money work for you!