All of us attempt to set aside a certain amount for unexpected bills, whether they be medical or otherwise. However, there may be instances in which this amount is insufficient, in which case it becomes necessary to find alternative sources of funding. Most people turn to personal loans when they are having financial difficulties. A lesser-known alternative, though, is Loan Against PPF, which is something you should look into. By being aware of the differences between Loans Against PPF and Personal Loans, you may choose the one that best meets your requirements.
What is a Personal Loan?
A personal loan is a form of loan that is authorised based on your credit history and ability to repay the loan with your own income; it does not require collateral. This flexible loan choice can be employed for multiple purposes, like buying the newest smartphone, covering medical costs, financing a family member's wedding, or combining multiple loans. Nonetheless, personal loans sometimes have higher interest rates than secured loans, such as mortgages or auto loans, because they are unsecured. Before thinking about applying for a personal loan, it is important to thoroughly evaluate your financial status.
What is PPF?
Due to its many benefits in terms of safety, returns, and tax savings, the Public Provident Fund Scheme, also known as PPF, is a well-liked financial vehicle for long-term savings and investments. PPF was introduced in 1968 by the Finance Ministry's National Savings Institute and has since grown to be a powerful instrument for long-term wealth creation. To accumulate a retirement corpus, investors make consistent contributions to their PPF accounts. Because of the plan's favourable tax advantages and competitive interest rates, it has become very popular, especially with small savers. The main reason PPF is different from other investment options is that it gives tax exemption under Section 80C of the Income Tax Act, and the returns it generates are also tax-free.
Factors to consider when choosing between Personal Loan and Loan Against PPF
1. Availability
If you satisfy the requirements, which include having a consistent income stream, a strong credit score, and an age limit, you can get a personal loan fast. However, if you open a PPF account, you can choose to take advantage of a Loan Against Your Account during the third and sixth year. In the event that your PPF account was started during the 2020–21 fiscal year, for example, you would be eligible to request for a loan beginning in the following fiscal year, 2022–23. However, you should be aware that until the sixth year, or the financial year 2025–2026, you are not eligible to apply for a loan against your PPF account. Noteworthy is the fact that PPF account loan approval procedures usually need a considerable amount of time.
2. Frequency of Lending
Loans Against PPF are only taken out once every fiscal year. Taking out another loan against your PPF during the same fiscal year is not allowed, even if you have paid off your first loan in full. Regarding personal loans, nevertheless, such is not the case. Subject to completing the requirements for eligibility and the lender's readiness to grant the loan, you may apply for personal loans more than once in a calendar year.
3. Value of Loan:
You are limited to borrowing 25% of the deposited amount if you choose to apply for a Loan Against PPF. For instance, the highest loan amount you can obtain is Rs 50,000 if your deposit is Rs 2,00,000. On the other hand, in the event that you decide to apply for a personal loan online, your credit score and ability to repay the loan will be major determining factors. Depending on the lender's policy, personal loans may have a maximum amount of Rs 25,00,000 or even more. The maximum loan amount you are qualified for can be found using a personal loan eligibility calculator.
4. Loan Term:
Up to six years may pass during the repayment of a personal loan. The repayment period for a loan secured by PPF, however, is only three years from the date of approval.
5. Interest Rate
Personal Loans have high interest rates, usually between 10% and 20% annually, because there is no collateral involved. The interest rate on loans made against PPF accounts, on the other hand, is always 1%. This applies to all loan amounts. It is important to remember that the PPF account does not accrue interest during the loan payback period. It follows that the prevailing interest rate + 1% becomes the effective interest rate.
Personal Loan vs Loan Against PPF: Which one should you opt for?
It is crucial to take into account your unique needs and circumstances when choosing between a personal loan and a loan against PPF. A PPF Loan's interest rate is one percent greater than the interest accrued on a PPF account, as was previously noted. Bear in mind, nonetheless, that the PPF amount utilised as loan collateral will not be subject to interest charges for borrowers. Until the full loan amount is returned, the borrower will not be able to take advantage of the tax benefits associated with interest collected on the PPF account. The benefit of compounding tax-free returns is another feature of the PPF account.The borrower will forfeit the compounding benefits of tax-free returns in addition to losing out on tax-exempt interest should they choose a Loan Against PPF. Because of the loss of compounding effects, the loan facility, which is offered in the early years of starting a PPF account, may negatively affect the growth of the retirement corpus.
If the loan amount fits your needs, you can repay the loan within the allotted 36 months, and the loan against PPF has a cheaper interest rate than the personal loan you are considering, then going with the loan against PPF is the better option. However, bear in mind that getting a PPF loan could require more time than getting a personal loan. Conversely, in case you require money immediately or if the PPF Loan's available loan amount is not enough, go for a personal loan. To make the best decision for your circumstances, it's also a good idea to thoroughly weigh your options, which should include looking over the pre-approved loan offers from your bank.
