Everything You Need to Know About Loans Against SIP

Key Takeaways:

Loans against SIP help you secure funds using your mutual funds as collateral. This way you can avoid the liquidation of your investments.
Loans against SIP have lower interest rates and flexible repayment structures.
A limited loan amount is a potential impediment to such loans.
The process is quick and simple as you can secure funds within minutes.

Imagine having the option to access funds without liquidating your mutual fund investments. Loans against SIP make this possible.

SIPs (Systematic Investment Plans) strike the right balance between flexibility and structured financial planning. It instills thriftiness without jeopardizing long-term financial goals.

Here’s everything you need to know about Loans against SIPs.

Understanding Loans Against SIP

A loan against SIP is a financial arrangement that allows you to borrow money using your mutual funds as collateral.

This alternative is a line of credit through which you use your mutual funds to get money from a bank or any other financial institution.

Your mutual fund investments act as a guarantee that you will repay the money with interest, and should you fail to repay, the lender can sell your mutual funds to cover the loss. It is a convenient way of accessing funds without liquidating your investments entirely.

So, if there’s any pressing financial crisis, opting for a loan against SIP may be in your best interest. You might consider cashing your investments due to poor financial counseling.

How Do Loans Against SIPs Work?

There are a few determinants of your maximum loan amount.

Net Asset Value
LTV ratio that is applied to your specific fund category
The minimum value of your portfolio

When you repay the loan, the condition (of your mutual fund as collateral) is also revoked. But in case you fail, the lender sells your mutual fund investment to recover the borrowed amount.

The loan depends on the SIP unit value, carefully evaluated by the lender, and the loan amount is 50 to 80 percent of its total value.

Factors That Influence Loans Against SIP

There are various aspects to consider when you’re opting for this loan because they influence the terms and conditions and the amount of loan you can get.

SIP Value: SIP unit value can simply be understood as the total value you’ve contributed to your mutual fund investments. This value determines the worth of your investment.
Loan to Value Ratio: The loan-to-value (LTV) is a financial term that compares the amount of money you borrow with the value of what you buy. Although it doesn’t have a direct impact, it does determine how much money you can borrow against your mutual fund.
Credit Score: This essentially reflects your financial stability. If your credit history is disciplined, your chances of obtaining a loan against SIP are higher.

Note: At 50Fin, there’s no minimum credit score required to borrow a loan.

Interest Rates: The interest rates rely on market stability and the conditions set by the lender.
EMIs: The lender decides the scheduling and flexibility of the repayment. While some lenders are lenient, others may not be.

Loan Against SIP vs Personal Loan – A Comparison

While both personal loans and loans against SIP offer quick access to funds, their impact and conditions distinguish them.

Condition	Loan Against SIP	Personal Loan
Interest Rate	Low	High
Collateral	SIP Units	None
Flexible EMIs	Highly flexible	Moderate flexibility
Loan Amount	50% to 80% SIP value	Dependant on income/credit score
Credit Score	Minimal impact	Considerably higher impact

Benefits of Getting Loans Against SIP

In June, the mutual fund SIP contribution closed at 21,260 crore, swiftly crossing the 1 lakh crore mark, supporting its growing popularity in the region.

The increasing trust and confidence in seeking loans against SIP is a testament to its wide range of benefits. Here’s why this option may be wise.

Instant Funding

Getting a loan against your mutual fund SIPs is the best solution should you find yourself in a cash-strapped situation. We say this because the process is extremely quick.

Not only is it completely digitalized, but it also requires minimum paperwork.

And here’s the best part, because the risks associated with this loan type are low, most lenders approve it within minutes.

Affordable Interest Rates

Popular loans, like personal loans, are riskier due to the lack of security, giving loans against SIPs an edge.

Because loans against SIPs are backed by assets, your financial cushion, they end up reducing the interest rates.

Suitable For Short-Term Goals

If the requirement is only short-term, it is best to get loans against SIPs as opposed to cashing your investments.

This type of loan meets your urgent financial needs without compromising your long-term financial goals.

Interest Is Applicable Only On The Amount You Withdraw

If you are concerned about how you will repay the loan with interest, there’s some relief for you.

The interest rate will be applicable only on the amount of loan you used and the duration of its use, not the entire loan that you’ve been sanctioned, making it not only manageable but also budget-friendly.

Challenges of SIP (Systematic Investment Plans)

There’s a dash of risk with every loan. The good thing about SIPs is that the risks are fewer and less volatile. Some of the risks include:

Market Condition: The market conditions dictate the value of the SIP unit. So it will eventually reflect in the value of the collateral.

Accumulation Of Unpaid Interest: Accumulation of interest is another aspect that you should consider. Thus, it is essential that you timely pay your due interest; this way the payment will remain manageable.

Limited Loan Amount: This loan may not appeal to you if you need a larger amount. The amount you can procure from this loan is usually small, the reason being the restricted percentage of the value of SIP units.

So, make sure you manage expectations. For example, it may not be sufficient for a home loan, but it can be ideal for a temporary cash-strapped situation.

Steps to Get A Loan Against SIP

If you’ve decided to get a loan against SIP, you may wonder how to go about it and what the process looks like.

Here are the steps:

Step 1: Choose a lender, a bank, or a financial institution that offers loans against SIPs.

Step 2: The lender would have an app or a website where you must register. So, go to the portal and enter your credentials.

Step 3: Fill out the requirements in the online application form. You’d have to fill out details like scheme name, folio number, and the number of units.

Step 4: Complete the eKYC form and upload your Aadhaar and PAN Card copies. This way the lender can evaluate your legitimacy.

Step 5: Provide your bank details and then choose your RTA.

Step 6: You will log in to your RTA account and choose the fund and units you wish to pledge as collateral.

Step 7: You will receive an OTP verification if you accept the proposed loan amount. Complete it.

Step 8: Lastly, you have to create electronic payments. Read the agreement carefully, then sign and submit.

Should You REALLY Get A Loan Against SIP – An Opinion

Taking a loan against SIPs is a strategic financial move. Here’s why:

It helps you secure immediate funds without having to liquidate your long-term investments.
Loans against SIPs offer flexible repayment options and the interest is only on the amount you use, not the entire sanctioned amount.
The funding is confirmed within minutes so you don’t spend hours doing the paperwork, waiting for approval.

The right way to approach this is by carefully assessing your financial situation. You have to make sure that you understand the terms and conditions and market stability before pledging your mutual funds.

This holistic view will help you see the potential of getting loans against SIPs.

Conclusion

Loans against SIPs provide a silver lining to those with pressing financial needs.

Characterized by low interest rates and flexible repayment options, loans against SIP help you navigate temporary and short-term financial problems.

With just a 10.5% interest rate per annum, an approval time of 7 minutes, and a disbursal time of less than 4 hours, 50Fin is one of the best options to borrow a loan against your SIPs.

With 50Fin, you can opt for a loan against SIPs without suspending long-term financial investments.

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