Personal Loan Vs Loan against PPF
Many people hesitate in taking a loan and prefer dipping into their savings, even if it means breaking their nest egg meant for their future requirements. However, if you know your necessity, utility and repayment capacity well taking a loan can be a boon to meet your immediate unplanned financial needs. A suitable loan option can be a powerful tool in managing your finances, provided you use it responsibly.
The most common form of loan is a personal loan, which comes in handy in case of financial crunch. Factors like flexibility of usage and short loan processing time make it product of choice. Another common way used to cover immediate expenses without breaking the bank is a Loan against PPF. Using this option you can get credit against the money in your PPF account. So, which option should you go for when you are in urgent need of funds? Here’s a low-down to ease your confusion and help you choose smartly:
- Loan Tenure: The repayment tenure of a personal loan is decided after both the parties agree upon a specific term at the time of availing the loan. However, a loan against PPF must necessarily be repaid within 3 years, and if one fails to do so, the interest rate increases by 4% from the current rate.
- Loan Amount: For a loan against PPF, the maximum amount you can borrow is 25% of the PPF account balance at the end of the second year prior to the loan application year. For example, in case you are applying for a loan in 2017-18, the loan amount will depend on the PPF balance at the end of 2015-16. Such is not the case with personal loan, where your loan amount will depend upon your income slab and repayment history along with a few other factors.
- Borrow more than once a year: A loan against PPF can help you deal with the liquidity crunch but only once in a year. You are not allowed to avail a second loan in a fiscal, even if the previous loan has been repaid. This is where Personal loan wins again; you can take more than one personal loan in a year as long as you are paying your EMIs on time and the lender is ready to lend you more money.
- Interest Rates: In case of personal loans the interest rate to be charged is often negotiable. An applicant can negotiate for lower rates, provided he/she shares a good rapport with the bank and has a reliable credit history. Usually, the interest rate for personal loan ranges from 11.25% to 24% per annum. However, though there is no scope of negotiation in case of Loans against PPF and the rate of interest will always be 2% more than the current rate offered on PPF balance, it is far lower than your Personal Loan interest rates, provided you repay the loan amount within 3 years. After this, the interest rate jumps to 6% more than the current rate offered on PPF balance. Another positive for a loan against PPF is that the interest accumulation on the original balance in your PPF account continues even after you have availed a loan against it.
So, if the loan amount you are eligible for in case of a loan against PPF suffices your needs and you will be able to repay it in the next 36 months, go for a loan against PPF, since it offers a much lesser interest rate. Do note a loan against PPF takes longer to process than a personal loan. So, if your need for funds is extremely urgent or the loan amount you are eligible for in case of loan against PPF is not enough, apply for a personal loan, preferably from an aggregator to find the best option.