Financial emergencies often arise without warning, necessitating the need for instant availability of funds. An effective way to address such situations is to avail a loan against your investments. This option is particularly beneficial if you hold investments like fixed deposits (FDs) or mutual funds. Considering the current financial landscape, availing a loan against FD interest rates is emerging as a smart choice. Here, we’ll delve deeper into this subject and draw comparisons with the loan against mutual funds interest rate.
Loan Against FD Interest Rate: An Overview
The loan against FD is a secured loan where your fixed deposit acts as collateral. This provides a safety net for the financial institution, making the approval process smoother and more effortless. The most significant benefit of this financial instrument is the lower interest rate, which typically stands around 1-2% higher than the FD interest rate itself.
The loan against FD interest rate is appealing because it’s significantly lower than the rates enforced on unsecured loans. It’s a win-win situation for the borrower, as they can continue to earn interest on the FD while enjoying access to immediate funds at lower costs.
Smart Reasons to Choose Loan against FD Interest Rates
- Lower Interest Rates: As already mentioned, the interest rates for loans against FDs are arguably the most competitive in the market. This makes it a cost-effective option for those seeking instant liquidity.
- Flexibility: Loan against FD provides flexibility in terms of repayment. The tenure usually aligns with the remaining FD term. Moreover, most financial institutions allow the option of prepayment or part-payment of the loan without levying additional charges.
- No Impact on Credit Score: The non-payment of your loan does not affect your credit score because your FD acts as the collateral.
- Quick Processing: Since it’s a type of secured loan, the processing is relatively fast with minimum documentation.
Loan Against Mutual Funds Interest Rates: A Brief Understanding
Just like FDs, mutual funds also offer the option of loans against them. A loan against mutual funds interest rate is typically calculated by adding a few percentage points to the market Repo rate. However, the rates can vary with the market conditions and the lending institution’s policies.
Why Consider Loan Against FD Interest Rate over Mutual Funds?
There’s no denying that both FDs and mutual funds are viable options for availing loans. However, a few compelling reasons likely make loan against FD interest rates a preferred choice:
- Interest Rate Stability: The loan against FD interest rates remains steady, unaffected by market volatility. This is not the case with mutual funds, which can fluctuate due to market conditions.
- No Liquidation of Assets: In the event of default, only the FD account, which is the collateral, is impacted, ensuring that other assets are secure. In the case of mutual funds, the fund units may need to be sold to recover the loan amount.
- A Better Option for Risk-Averse: Fixed deposits are deemed safer than mutual funds, which are subject to market risks. Hence, for those who prioritize safety above all else, a loan against FD can be a smarter choice.
- No Impact on Returns: While availing loan against FD, it continues to earn interest. Mutual funds’ returns, however, can diminish due to market fluctuations or the required liquidation of units.
Weighing in the various benefits and conveniences offered, loan against FD interest rates emerges as a reliable and smart choice for many. While it’s essential to consider personal financial circumstances and objectives, the idea of unlocking immediate funds while keeping the investment intact offers a distinct advantage. The ease of application, quick approval process, and cost-effectiveness make loan against FD interest rates a go-to solution for many seeking immediate funds in volatile financial terrains.