Personal Loan or Loan Against PPF - Know Which is Better!

When financial needs arise, finding the right loan option can save you from dipping into your hard-earned savings. Whether you're facing a medical emergency, planning a wedding, or managing other large expenses, borrowing can help you bridge the financial gap.

However, choosing the right type of loan for your situation can make a world of difference. Two of the most common loan options available are Personal Loans and Loans Against PPF (Public Provident Fund).

While both options can provide much-needed funds, they have different purposes and distinct advantages and limitations. If you're unsure about which loan is better, this blog will provide a detailed comparison between them. Understanding these differences will help you to make an informed decision.

What is a Personal Loan?

A Personal Loan is an unsecured loan offered by financial institutions or banks. That means you don't need to provide any collateral. These loans are known for their quick approval, minimal documentation, and flexibility in use. You can use the funds for anything from financing a wedding to covering medical bills or consolidating debt.

Also read: Unsecured loans: Understanding Its Types and Benefits

Features of Personal Loans:

• Since it's an unsecured loan, there is no need to pledge any asset.
• With no restrictions, you can use the loan amount for any personal or financial requirement.
• Many banks and lenders offer quick disbursal of funds, sometimes within a few hours or days.
• You can borrow amounts based on your income, credit score, and repayment capacity.
• Depending on your credit score and lender policies, personal loan interest rates range between 10% and 24%.

Also Read: Understanding Personal Loan Disbursement process

What is a Loan Against PPF?

A Loan Against PPF allows you to borrow against your Public Provident Fund (PPF) balance. PPF is a long-term investment scheme backed by the government, with a maturity period of 15 years. The fund allows partial withdrawals after the sixth year, but if you need liquidity before that, you can opt for a loan on a PPF account.

Features of Loan Against PPF

• Since this loan is secured against your PPF balance, you get lower interest rates.
• The loan amount is usually capped at 25% of the PPF balance at the end of the second year preceding the loan application year.
• Interest rates on loans against PPF are typically much lower than those on personal loans, often starting around 1% to 2% higher than the PPF interest rate.
• While you have an outstanding loan against your PPF, the amount borrowed does not earn any PPF interest until the loan is repaid.
• The loan repayment tenure is usually a maximum of 36 months.

Differentiating Personal Loans and Loans Against PPF

1. Loan Amount

The loan amount is one of the most significant differences between the two options.

Depending on your income, credit score, and financial standing, you can borrow up to Rs 50 lakh on a personal loan.

The Loan Against PPF amount is limited to 25% of your PPF balance at the end of the second financial year preceding the loan application year.

2. Interest Rates

Since it's an unsecured loan, interest rates on personal loans are higher. Depending on your credit profile, these can range from 10% to 24%.

The interest rate for a PPF loan is significantly lower, typically around 1% to 2% higher than the current PPF interest rate.

Also Read: What is the Interest Rate on a Personal Loan in India

3. Collateral Requirements

No collateral is required for personal loans as they are unsecured.

The loan against PF is secured against your PPF balance, which acts as collateral. In case of non-repayment, the outstanding loan amount can be adjusted against your PPF balance.

4. Repayment Tenure

Personal Loans offer a more flexible repayment period ranging from 12 to 72 months, allowing you to choose a tenure that fits your financial capabilities.

The repayment tenure for a PPF loan is shorter, usually up to 36 months. This shorter period can make it harder to manage if you've borrowed a substantial amount.

5. Eligibility Criteria

Personal Loans are available to both salaried and self-employed individuals, but eligibility is largely dependent on your income, credit score, and existing liabilities. A CIBIL score above 700 increases your chances of approval.

The eligibility for a loan against PF is directly linked to your PPF account balance. You are only eligible for this loan between the third and sixth year of your PPF account, and it cannot be taken more than once a year.

Pros & Cons

Personal Loans: Pros

• Quick access to large sums of money.
• No collateral is required.
• Flexible usage for various purposes.
• Longer repayment tenures.

Personal Loans: Cons

• Higher interest rates compared to secured loans.
• Requires a good credit score for better interest rates.

Loan Against PPF: Pros

• Lower interest rates make it an economic choice.
• Secured by your PPF balance, reducing the risk for lenders.
• A good option if you don't want to break your PPF prematurely.

Loan Against PPF: Cons

• The loan amount is limited based on your PPF balance.
• Shorter repayment tenure can increase your EMI burden.
• No interest is earned in the borrowed amount until the loan is repaid.

Which Loan Option is Better for You?

The choice between a Personal Loan and a Loan Against PF depends on your financial needs and the urgency of your requirements. Here's how you can decide.

Choose a Personal Loan if:

• You need a substantial loan amount.
• You have an urgent need for funds.
• You want a longer repayment tenure with affordable EMIs.

Choose a Loan Against PPF if:

• You need a smaller loan amount.
• You are looking for a low-cost borrowing option.
• You don't want to break your PPF prematurely.
• You can manage the shorter repayment period.

Conclusion

Both options have their merits, and choosing the right one depends on your financial situation. If you're looking for a lower interest rate and are willing to borrow a smaller amount, a Loan Against PPF can be ideal. However, if you need quick access to a larger sum with flexibility in repayment, a Personal Loan might be the better choice.