Personal loan on credit card vs pledging Mutual Funds: Which is a better credit option?

Personal loans help people to meet financial emergencies and it has become quite convenient to avail loans with the advent of digital lending platforms. When opting for a loan instrument, people look at all the possible options and compare the interest rates before making a final decision. Rising interest rates on loans have prompted people to start relooking at the debt options, focusing on whether they want to pay loans through higher EMIs or opt for extended loan tenure. Among all the possible loan options available, loans against credit cards and pledging mutual funds have become one of the popular modes.

While loan seekers are often confused when making a decision between seeking loans on credit cards or against mutual fund investment, here are a few important factors to consider.

What is loan against credit cards?

Loans against credit cards are a sort of personal loan where one can easily apply for an instant loan that too without any documentation. While it is a kind of unsecured loan, it is the best option for those who need immediate cash to deal with financial emergencies. Also, it may come with lower interest rates in certain cases.

What are loans against mutual funds?

If you are looking for a personal loan, you can avail credit by pledging mutual fund investment. In such cases, investors provide their units as collateral to the banks while still holding the ownership.  Loan against mutual fund works on the concept of Loan to Value (LTV) and can be availed against both equity and debt funds.

What is a better credit option?

When making a comparison between loans against mutual funds and credit cards, individuals need to take a few things into consideration.

While credit cards offer instant financial support, loan against mutual funds comes with a series of benefits like competitive interest rate, quick disbursal and the benefit of continued returns.

Read the following points to make a better choice between the two credit options:  

1. In the case of loans against credit cards, banks block the cash withdrawal limit on the cards, as a result of which you may not be able to use that amount until the repayment is done. On the other hand, a loan against mutual funds helps to meet your financial requirement and at the same time also preserves the investment. Along with that, the units will also continue to earn the returns a per the Mutual Fund scheme.

2. Loans against credit cards are an unsecured form of credit line, while loans against mutual funds are secured options that are offered at a competitive interest rate. This often makes loans against mutual funds a far more economical option than credit cards. As the interest is calculated on the utilised loan amount, you can repay the amount in EMIs.

3. Loans against credit cards are disbursed quickly and it is the same for mutual funds as well. While no documents are required for the credit cards, loans against mutual funds need certain documentation, following which the loan request will be processed and the amount will be disbursed within the stipulated time, as decided by the lender.

Taking all these points into consideration, it seems like taking a loan against mutual funds is a better option as it helps investors to use their existing investments to access funds for their financial needs. After making a proper comparison and seeking the right information about the process, one can make an application for the loan.

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