What is a Personal Loan?
A personal loan is an unsecured loan that is readily available from banks, NBFCs, and other lenders and is a popular credit option. Personal loans are distinguished from other loans by their simplified verification procedure, quick approval and payout, and huge loan amounts. However, in exchange for these benefits, the borrower may be required to pay a rather high personal loan interest rate. If you take out a personal loan from a bank or a non-bank financial institution, you can avoid this.
What is a Loan Against a PPF account?
A Public Provident Fund, or PPF, is a long-term investment vehicle sponsored by the government that offers a competitive interest rate and tax-free returns. To take advantage of features like credit eligibility, flexibility, and account growth, investors must contribute between $500 and 1.5 lakh per financial year. After 15 years, a PPF account matures. The PPF interest rate for the current year is announced by the Ministry of Finance every quarter. The interest is compounded annually and paid on March 31.
To make a partial withdrawal from their PPF account, the investor has five years from the end of the financial year in which the original subscription was made.
Personal Loan vs. Loan Against a PPF account
- The payback duration for a personal loan might range from 12 to 60 months, depending on the loan agreement; if you miss a payment, your credit score will suffer. A loan taken out against a PPF must be repaid within 36 months; otherwise the interest rate will increase by 4%.
- A personal loan might be rather big (up to Rs. 25 lakhs), depending on your earnings and repayment capabilities. A loan against a PPF, on the other hand, is limited to 25% of the account balance at the end of the second financial year prior to the year in which the loan is requested. If your account balance is low, regardless of your salary, the loan amount will be significantly reduced.
- If you pay your EMIs on time and your lender is prepared to offer you extra money, you can take out more than one personal loan every year from an instant lending app. This is not possible with a PPF loan since you are only authorised to accept one loan every fiscal year.
- Personal loan interest rates are higher, ranging from 10.75 to 25% per year, than loan against PPF interest rates, which are just 1% more than interest earned on the PPF account balance.
A personal loan is available quickly as long as you fulfill certain pre-requisite conditions such as healthy credit score, age, steady income, etc. With PPF, you’re allowed to avail a loan against PPF account from 3rd to 6th year of PPF account opening. This means if you have opened your PPF account in FY15-16, you’re allowed to avail a loan by the 3rd year i.e FY17-18. You will be eligible to avail for a loan only till the sixth year -i.e., FY20-21. And the loan takes a while to get sanctioned.
With a personal loan, there is no ceiling to amount of loan you can avail. It may vary according to a bank’s lending parameters. But largely, as long as you fulfill the pre-requisite stipulations, there shouldn’t be a problem with the quantum of loan you avail. In the case of PPF, there is a caveat attached to the loan amount that can be procured. According to the scheme rules, the amount of loan you can avail should not exceed 25 per cent of the amount that was available in the account at the end of the second year immediately preceding the year in which the loan is applied for. For e.g.- If you avail for the loan in FY21, the amount cannot exceed 25 per cent of the balance in your account in FY19.
A personal loan can be availed for up to 6 years. In the case of PPF, the loan has to be repaid within 3 years of sanction.
Since a personal loan is unsecured, the interest rates on the same are very high. They could range between 10-20 per cent per annum. With PPFs, any loan taken against the account is charged at 1 per cent interest, irrespective of the amount. However, you must understand that your PPF account does not earn any interest till the loan is repaid. Thus, the effective rate of interest is the prevailing interest rate + 1 per cent.
Which one should you choose – Personal Loan or PPF?
The choice would depend on whether you require a loan that is available at a low rate of interest but which would take time to get sanctioned like a loan against PPF or a loan that is easily available for a longer period like a personal loan but at a slightly higher rate of interest.
A loan against PPF would not be beneficial if you do not have enough funds in your PPF account as the loan amount sanctioned is derived based on it, while a personal loan can be flexibly availed based on the maximum loan amount provided by the lender.