Gold, mutual fund, personal or credit-card loan: Which is the cheapest way to borrow money?

Loans against mutual funds

If you hold shares or mutual funds but prefer not to redeem them, you can still access emergency funds through pledging. Pledging allows investors to use their investments such as stocks, mutual funds, r other securities as collateral to secure a loan from a financial institution or lender.

These loans provide quick access to your funds without redeeming them. They have lower interest rates compared to personal loans or credit cards. The application process is simple, fully digital and requires minimum documentation. You can avail such a loan by a few click though your investing app.

Pledging assets usually comes with lower interest rates compared to traditional personal loans or credit-card debt. The collateral provides security to the lender, reducing their risk and, in turn, lowering the rate. For instance, personal loans typically carry rates of 11–24 percent, whereas pledging mutual fund units can bring rates down to 8 to 15 percent.

The loan to value (LTV) ratio of equity mutual funds is 50-70 percent and in debt, it is 80 percent. For shares, LTV is generally between 30 percent to 45 percent, depending on the shares.

There are some risks that you should be to be aware of. Mark-to-market margin calls would require borrowers to top up funds if the mutual fund’s net asset value (NAV) declines; otherwise, lenders can redeem units, sometimes attracting exit loads and capital gains tax.

“Moreover, dividends or Income Distribution cum Capital Withdrawals (IDCW) can be directed towards loan repayment, limiting the borrower’s cash flow,” said Shahi. This means that when you get a payment from your mutual fund, it can be automatically used to pay down a loan instead of being paid out to you.

Loan against gold

A gold loan is another type of secured loan where gold serves as collateral. You borrow a sum of money and pay interest over a chosen period. Once the loan, along with interest, is fully paid, you get back your pledged gold. Many lenders also allow partial repayments or a partial release of gold, giving borrowers greater flexibility in managing their loan.

Gold price fluctuations can impact these loans. If gold prices fall sharply, borrowers may need to repay a portion of the loan or pledge additional gold to maintain the LTV ratio. On the other hand, when gold prices rise, the higher collateral value could make you eligible for a larger loan.

The loan to value ratio is 75 percent. The interest rate is lower than personal loans at 8.20-18 percent and the disbursal is quick. Lenders won’t require detailed income assessment or credit checks for gold loans below Rs 2.5 lakh

Personal loan

Personal loans require no collateral and are also characterised by fast disbursals, flexible tenures of up to five years and high interest rates starting from 11 percent per annum, though they can go up to 24 percent per annum.

While you can get quick access to funds, cons include a negative effect on your credit score if you do not pay EMIs on time, penalties for late payments, and eventually, the risk of a debt trap.

“Personal loans may seem attractive with festival offers but they can involve high processing fees, prepayment charges, or strict EMIs. Credit card loans are the most expensive, with interest starting from the day of the loan,” said Saurabh Bansal, founder, Finatwork Investment Advisor, a SEBI RIA registered investment adviser.

One key factor to consider is that the interest on a personal loan does not carry goods and services tax (GST). However, if the bank offers a pre-approved loan against the credit-card limit, the interest portion of the loan may be subjected to GST but the the principal won't.

Credit card loans

Any spending you make on your credit card is interest free if you make the entire payment by the due date. If you do not or make the minimum payment, the interest charged can be as high as 45 percent. Running into credit card debt is one of the worst things you can do to your finances. If you don’t pay your full bill by the due date, interest accrues on the remaining balance each day. This daily interest adds up and compounds over the billing cycle. Things can get out of hand very quickly.

“Credit card loans are the toughest to manage. Interest can run as high as 40–50 percent annually, and unless you clear dues in full each month, costs pile up quickly,” Shahi said.

If you cannot pay your bill on time, credit cards offer you the option to convert your outstanding into EMIs, which you can pay back over six, 12 or 24 months. Here, the interest rates are much lower (between 13-24 percent per annum). But this blocks your credit limit and the consequences of default are as bad as not paying your credit card bills on time.

The other option is to get a personal loan against your credit card. Since you have a credit card, it is a pre-approved loan and requires minimal documentation. The interest rates are lower than what you would pay if you default on a credit card payment. They range from 13-22 percent per annum. The loan is repaid in terms of EMIs that are added to your credit card bill every month. Your credit limit is reduced by the amount of loan outstanding. But again, defaulting on the EMI will play havoc with your finances and impact your credit score.

Secured vs personal loan

It is always easy to pick what looks convenient but the fine print can turn convenience into a costly debt. “When it comes to repayment terms, secured loans usually feel easier on the pocket. Gold loans and loans against mutual funds often come with lower interest rates and flexible repayment options, including overdraft-style or interest-only payments,” said Kundan Shahi, founder, Zavo, a loan repayments platform.

Personal loans, on the other hand, lock you into fixed EMIs for one to five years. While predictable, the lack of flexibility means you must plan your monthly budget carefully.

“If you own assets like gold or mutual funds and are comfortable pledging them, secured loans are the most cost-effective choice because of their lower interest rates and higher borrowing capacity,” said Rahul Kalyani, SVP, LoanTap, a digital lending platform.

They do come with the risk of losing assets in case of non-repayment. If you prefer not to have collateral, an unsecured personal loan is a safer alternative despite being slightly more expensive.

If the need is small and you’re sure you can repay before the billing cycle ends, using a credit card can be efficient. But for larger, longer-term expenses, secured loans against mutual funds or gold are safer and cheaper. “During festivals, banks and NBFCs often advertise ‘special offers’ ,  but remember, every offer comes with terms and conditions. Reading the fine print is non-negotiable,” Bansal said.