Difference between personal loan & loan against PPF account | Photo credit: iStock images
Personal loans are intended for extreme emergencies as they bear the highest interest on loans available to retail borrowers. Ideally, it’s best to tap into your emergency fund to deal with the unexpected.
However, things are not always planned and personal loans are not meant to overcome such emergencies. It can be used to deal with short term financial problems or one can also borrow from one’s public provident fund (PPF).
However, when it comes to making a choice between a loan against PPF or a personal loan, which should be chosen?
Here are some things to look for if you are faced with the decision.
The borrowing limit for personal loans varies from bank to bank and is based on parameters such as the borrower’s profile and other factors. In PPF, the borrowing limit cannot be greater than 25% of the account amount at the end of the second year preceding the year in which the loan amount is used.
Also, while a PPF account loan can be used between the third and sixth fiscal year of opening the PPF account.
Personal loans are unsecured and hence the interest rates are high and can range between 10-20%. On the contrary, the interest on the loan against PPF is only 1%, but the account holder does not receive any interest on the amount of the PPF until the loan is repaid. Therefore, the effective rate is the prevailing interest rate + 1% on the loan on the PPF account.
However, experts say that the loan against PPF is ideal if taken for short terms and for smaller amounts. For higher amounts, personal loans are preferable. It is cheaper than the personal loan which is still higher, given the current PPF rate of 7.1%. In the event of a loan, the PPF subscriber will not receive any interest (to the extent of the loan amount taken) until the principal amount plus interest is repaid.
Also, the PPF account holder loses the cumulative effect on the interest lost due to the loan. As the PPF loan is only available in the first part, the cumulative effect of the lost interest will be very high at the time of maturity.