Monthly Archives: August 2014

Using A Mutual Fund As Collateral For A New Loan

When it comes to collateral for a loan, a question that often comes up is “can I use my mutual fund as collateral?” The answer to that is a bit complicated. While nothing prevents you from using your mutual fund as collateral, it boils down often to if the lender will accept it. Mutual funds are not an attractive form of collateral for a lender, due to certain procedural issues. In general most standard lenders do not like Equities as Collateral. A private lender may be more willing to accept it as collateral however, such as lenders on peer to peer lending sites.

Lenders prefer collateral that can be seized readily, such as a car, boat or real estate. Banks are already equipped to seize these assets when a loan goes bad, and they do so every week of the year. A mutual fund as collateral for example needs to be appraised in house, it cannot be outsourced. The lender may simply lack the expertise needed to properly appraise it. Mutual Funds are also seen as a volatile asset whose worth can change from one day to the next due to market conditions, so mutual funds are an undiversified risk for a lender to take. There is also the issue of the bank acquiring your mutual fund should you default on the loan, which would require the banks legal department putting in extra time, effort and resources adding to the expense for the bank to receive undisputed title to the mutual fund in question.

Should you happen to find a bank or private lender willing to take a mutual fund as collateral, you will need to hand the lender the physical mutual fund certificate, as the lender will require physical access to the paper certificate, as well as a written agreement spelling out the right to sell the fund should you default on your loan so that they may recover the money lent for the loan terms. If you already have the certificate in your possession that part is rather easy, however if you went through a broker you will have to contact them to get a certificate. With brokerages, most times there is no physical certificate, and the broker will then need to obtain one from the mutual fund’s management. Federal law requires them to provide you with the hard copy within 7 days of your request for it. Even if you never have the need to use a mutual fund as collateral or an asset, I would recommended highly that anyone who uses a broker for a mutual fund contact their broker to get a hard copy mutual fund certificate of their mutual fund. If you do use a mutual fund as an asset for a loan, your rights to the mutual fund may indeed be limited for the duration of the loan, for example you may require the lenders permission to sell the fund or buy another fund. If your mutual fund is accepted as collateral, the bank may require the mutual fund to be kept in a separate brokerage account titled “Your name for the benefit of bank XYZ,”, with papers signed giving the bank the right to sell the mutual fund and apply it to the loan balance in the case of default.

Lenders that will accept a mutual fund as collateral I should point out will only lend 50% of the mutual funds value, for example if your mutual fund has a market value of $25,000.00
the bank would lend you $12,500.00 not the full $25,000.00 that the mutual fund currently has market wise. This is to hedge the banks potential loss should the mutual fund fall in value over the lifetime of the loan. Some banks also have approved lists of mutual finds they will accept as collateral and only the mutual funds on that list will they accept.

What Other Items Do Lenders Review Outside Of Your Credit Score

A common misconception with lending and borrowing is that people think it is only your credit score that matters when it comes to borrowing money. While it is certainly true that your FICO score plays a big role in the loan process, credits these days look beyond it. Many banks and creditors use 3 general guidelines when it comes to making the decision to grant credit or a loan, the three C’s of borrowing if you will. The three C’s of borrowing are Character, Capacity, and Collateral. These three factors help the credit institution figure out which consumers are the most profitable in a risk versus reward scenario that plays out every day in every financial institution across the United States and Canada.

Character. Your bill paying habits, your credit history, how many credit cards you have, how often if at all you have been late paying bills, all of these help in a credit sense determine your character. How serious are you about paying off your debts, which are contractual obligations? are you chronically late paying your bills? This information comes from the three credit reporting agencies Experian, TransUnion and Equifax. These days more and more creditors are using and pulling all three reports on you to gauge your trustworthiness, your ability to repay debts. They also factor in how much debt you have, if you have too many open lines of credit all carrying active balances this can make you less credit worthy.

Capacity. This is your debt to income ration. How much money is coming in and how much every month on average is going out the door to pay off bills. The length of your employment is used in house by the creditor as part of their internal ranking process. How much your monthly or yearly income as well is a factor. If you rent or own your own home also is a factor. None of these are part of credit reports, yet is vital when it comes to ranking you on a credit scale.

Collateral. This is any assets you can use to secure a loan, the material security that can be used to secure a loan. This collateral can be a house, boat, stocks, bonds or other such assets. The more assets you have, the more favorable you are to lenders, as it shows that you are not only responsable, but you have assets that can be sold off if needed to settle your debt.

The higher your credit report score, or FICO score and the more assets you have, the better chance you have at a loan with a favorable interest rate. If your debt to income ratio is low you are also more likely to find favorable lending terms. If you have plenty of assets this is another perk in your favor. It is best not try and hide assets when applying for a loan or credit, trying to hide them can actually cause you to not get the loan or receive higher interest rates. Banks are looking for consumers to behave in a way that will generate profit. It all comes down to the bottom line of which consumers will generate profit for the bank or lending institution. If you are more likely to default or be a liability for the banks bottom line you will likely get passed over for credit or a loan.