Loan against PPF vs Personal Loan: Which one should you choose?

Loans can always help bail you out of stressful situations. Here’s a guide to help you choose between a personal loan and a loan against a PPF account

Many are hesitant to take out a loan and prefer to delve into their savings, even if it means depleting their emergency fund. However, if you understand your demand, utility, and repayment ability, a loan might be a lifesaver in meeting unexpected financial circumstances. If used appropriately, a good loan option can be a great tool in managing your money.

But what kind of loan should one opt for in their time of need? Should you choose a personal loan or a loan against a PPF account? To make an informed choice, you need to know what you are delving into. Read on to know all the relevant details about a personal loan and a loan on a PPF account.  

What is a personal loan?

A commonly opted for credit option, a personal loan is an unsecured loan that is widely available from banks, NBFCs, as well as other lenders. A simple documentation process, rapid approval and disbursement, and large loan amounts distinguish personal loans from other loans. However, at times, the borrower must pay a relatively high personal loan interest rate in exchange for these perks. This can be avoided if you opt to take a personal loan from a bank, such as IDFC FIRST Bank. We offer quick personal loans at reasonable personal loan rates. These personal loans can help you get your job done without creating a dent in your pocket. You can also use IDFC FIRST Bank’s personal loan EMI calculator, which you will find on our mobile banking service, to know what the best loan amount and term for you will be.

What is a loan against a PPF account?

A Public Provident Fund, or PPF, is a government-backed long-term way of investing with a competitive interest rate and tax-free returns. Investors must invest between ₹500 and ₹1.5 lakh every financial year to benefit from features, such as credit eligibility, flexibility, and account expansion. A PPF Account matures after 15 years. Every quarter, the Ministry of Finance announces the PPF interest rate for that year. The interest is compounded and paid on March 31 each year.

The investor has five years from the conclusion of the financial year in which the original subscription was made to make a partial withdrawal from their PPF account. While no withdrawal from the account can be made before the commencement of the seventh financial year from the date of the initial investments, you can take a loan on your PPF account. In this situation, the loan against PPF amount is determined by the account balance at the end of the previous fiscal year. The low-interest rate levied on the loan against the PPF amount is what makes this short-term loan so appealing.

Personal loan vs loan against PPF
 

• A personal loan's repayment period can range from 12 to 60 months, based on the loan arrangement, missing out on which you risk your credit score. A loan against PPF must be returned within 36 months, failing which the interest rate will increase by 4%.
• With a personal loan, the loan amount can be rather large (up to ₹25 lakhs), based on your salary and repayment capacity. A loan against PPF, on the other hand, limits the loan amount to 25% of the account balance at the end of the second financial year before the year in which you apply for the loan. Regardless of your wages, if your account balance is low, the loan amount will be substantially lower.
• You can take out over one personal loan per year from an instant loan app, if you settle your EMIs on time and your lender is willing to grant you more money. This is not allowed with a loan against PPF, as you are only permitted to take one loan every fiscal year.
• Personal loan interest rates are higher, ranging from 10.75 to 25% per year, as opposed to loan against PPF interest rates, which are only 1% greater than the interest received on the PPF account balance.

Which among the two should you choose?

Opt for a loan against PPF if:

• Has a lower interest rate than the personal loan option that you are considering
• The loan amount you are qualified for is sufficient for your needs
• You will be able to repay the loan within 36 months

It's worth noting that a PPF loan takes longer to arrange than a personal loan. So, the choice is based on what you need.

Opt for a personal loan, if your need for funds is particularly urgent or the loan amount you are qualified for in the case of a loan against PPF is insufficient. Gauge your options and make your choice accordingly. Check your bank’s bank mobile app to know what options may be available for you.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.