Monthly Payments: LAMF vs. Personal Loans

In the realm of financial instruments, Loan Against Mutual Funds (LAMF) emerges as a powerful tool that allows individuals to unlock the potential of their mutual fund investments. Unlike conventional loan options such as personal loans, LAMF offers a distinctive set of advantages, including lower interest rates, flexible repayment structures, and reduced monthly payment commitments. This article delves into the nuances of LAMF, showcasing its advantages over other borrowing options.

Comparing Loan Against Mutual Funds (LAMF) and Personal Loans

• Retain Investment Portfolio: One of the most significant benefits is that you can keep your mutual fund investments intact. This is crucial if you want to make the most of compounding your investments.

• No Impact on Credit Score: Loan Against Mutual Funds doesn’t impact your credit score as it’s a secured loan. This is beneficial if you plan to apply for other loans or financial products in the future.

• Tax Efficiency: Opting for LAMF instead of selling mutual funds may have tax advantages, as you won’t trigger capital gains taxes that you might incur through redemption.

• Flexible Repayment Options: LAMF provides a distinct advantage over Personal Loans (PL) by offering flexible repayment terms. Unlike PL, where borrowers face the burden of paying the principal every month, LAMF allows individuals the freedom to repay the principal at their convenience, providing a more adaptable and manageable repayment schedule aligned with their financial situation.

Understanding Monthly Payments: LAMF vs. Personal Loan (PL)

One standout feature of LAMF lies in its monthly payment structure when compared to personal loans (PL). In LAMF, borrowers pay only the interest amount monthly, resulting in lower Equated Monthly Installments (EMIs) and greater repayment flexibility. To illustrate this concept, let’s consider a practical example:

Example: Assume a borrower takes a ₹1 lakh loan through LAMF with an annual interest rate of 10.75%, and the loan tenure is set at 3 years. In the first year, the monthly payment would amount to ₹896, accumulating to ₹10,750 in interest in a year. Conversely, a personal loan with a 13% interest rate would incur a monthly payment of ₹3,369 (including principal and interest), accumulating ₹11,305 in interest during the same 1-year period.

Table: Monthly Payments and Interest Comparison

In-Depth Analysis:

Over a three-year period, opting for LAMF results in a monthly interest payment of only ₹896. What sets LAMF apart is the flexibility it offers to borrowers – you have the option to repay the principal amount at any time during the 3-year tenure. Here’s the game-changer: with each principal repayment, your interest obligation decreases.

For example, let’s say you take a LAMF for ₹1 lakh in month 1. Suddenly, in month 2, you find yourself with an extra ₹50,000 that you can use to repay the principal. As a result, your principal amount drops by ₹50,000, and from the next month onward, your interest payment is halved to approximately ₹448. The beauty of this system lies in your ability to consistently reduce the principal amount at any point, thereby lowering your monthly interest burden. This flexibility stands in stark contrast to traditional personal loans, where fixed interest and principal payments are mandatory and prepayment of loan incurs additional charges.

Conclusion

In conclusion, Loan Against Mutual Funds offers a unique and advantageous approach to borrowing, providing borrowers with lower interest rates, flexible repayment terms, and ultimately resulting in more manageable financial commitments. As borrowers seek financial empowerment, LAMF emerges as a smarter choice among other alternatives.