Overdraft (OD) and Term Loans are the two most popular ways to borrow money against your mutual fund investments. Both provide a means of using your mutual fund assets to leverage them for your requirements financially, but they are very different in terms of repayment schedules, interest rates, and flexibility. We will contrast OD and Term Loans for Loans Against Mutual Funds in this blog post so that you can make an educated choice.
Overdraft (OD) for Loans Against Mutual Funds
An Overdraft facility allows borrowers to withdraw funds from their account even if the account balance is zero or in a negative state, up to a pre-approved limit. For Loans Against Mutual Funds, an OD against the value of mutual fund units can be availed, giving borrowers access to liquidity as per the value of their holdings. Here’s how it works:
1. Flexibility
OD provides a high level of flexibility, allowing you to borrow funds as needed up to a predetermined credit limit. You only pay interest on the amount you use.
2. Interest
It’s an affordable option if you need money for a short while because interest is only applied to the remaining amount. Usually, the interest rate is cheaper than that of credit cards.
3. Repayment
When it’s convenient for you, you can repay the loan balance. There is no predetermined payback schedule, but you must ensure that the value of your mutual fund portfolio consistently exceeds the borrowing limit.
4. Renewable
OD is renewable, meaning you can continue to borrow against your mutual funds as long as the account remains in good standing.
Term Loan for Loans Against Mutual Funds
A Term Loan is a lump-sum amount disbursed to the borrower and repaid over a specified period through fixed installments comprising principal and interest. For Loans Against Mutual Funds, borrowers receive a one-time disbursement based on the value of the pledged mutual fund units. Here’s how it differs:
1. Fixed Amount
You receive a lump sum amount upfront when you take out a term loan against your mutual funds.
2. Interest
Interest is charged on the entire loan amount from the beginning until the end of the loan term. The interest rate is generally fixed or variable, depending on the loan terms.
3. Repayment
Term loans come with a fixed repayment schedule, usually consisting of monthly installments. This provides clarity on when the loan will be fully repaid.
4. No Renewal
Unlike OD, term loans do not offer the flexibility to re-borrow the repaid principal. Once the loan is repaid, the borrowing process starts anew if needed.
Comparing Overdraft (OD) and Term Loan for Loans Against Mutual Funds
To facilitate an informed decision-making process, it is essential to compare OD and Term Loans based on various factors that influence the suitability of each option:
1. Interest Cost
OD typically incurs lower interest costs compared to term loans because you’re only charged interest on the amount you use. Term loans, on the other hand, have interest charged on the entire loan amount from the start.
2. Flexibility
OD provides greater flexibility in terms of borrowing and repaying funds. You can access funds as needed without adhering to a strict repayment schedule.
3. Repayment Structure
Term loans offer structured repayment schedules, providing clarity and predictability in terms of when the loan will be fully repaid.
4. Renewability
OD is renewable, allowing you to continue borrowing against your mutual funds as long as the account remains in good standing. Term loans need to be reapplied for once repaid.
5. Loan Amount
Term loans provide a lump sum upfront, making them suitable for larger, one-time expenses. OD allows you to borrow smaller amounts as needed.
6. Interest Rate
The interest rate on OD is often more competitive than that of term loans, making it cost-effective for short-term borrowing.
7. Suitability
OD is Ideal for short-term liquidity needs, flexible access to funds, and minimizing interest costs. Whether, Term Loan Suitable for larger expenses, fixed repayment plans, and long-term financial planning.
8. Control over Repayment
OD borrowers have greater control over repayment timing. Whether, Term Loan borrowers have less control over repayment timing due to fixed repayment schedule.
Loan Against Stocks:
In addition to Overdraft (OD) and Term Loans, another powerful financial tool to consider is a Loan Against Stocks. This type of loan allows you to leverage the value of your stock portfolio for immediate liquidity. In comparison to Loans Against Mutual Funds, a Loan Against Stocks caters to investors with a diverse portfolio in the stock market, offering a convenient way to unlock the value of their equity holdings for various financial requirements.
Loan Against Insurance Policies:
For individuals holding insurance policies, exploring a Loan Against Insurance Policies can provide an additional avenue for financial assistance. In comparison to Loans Against Mutual Funds, a Loan Against Insurance Policies provides an alternative for those with a life insurance policy, offering a strategic approach to leveraging the accumulated cash value for financial needs.
Conclusion
The choice between Overdraft (OD) and Term Loan for loans against mutual funds depends on your specific financial needs and preferences. If you require flexible, short-term access to funds and want to minimize interest costs, OD may be the better choice. On the other hand, if you have a fixed expense and prefer structured repayments, a term loan might be more suitable.
It is crucial to give serious thought to your financial status, the loan’s intended use, and your capacity to adhere to the repayment plan that has been selected. In the end, both choices present a worthwhile means of utilizing your mutual fund investments for diverse financial requirements, affording you financial adaptability and ease.