Loan Against PPF vs Personal Loan: Which One Is the Better Fit for You?

While we all try to keep aside some amount for medical or any sort of financial emergency, there could be times when the contingency fund falls short, and it becomes essential to look for other options to bear the emergency expenses. When faced with financial difficulty, Personal Loans are often the go-to choice of most individuals. However, there is one more less-known option that is worth exploring - Loan Against PPF. By understanding the nuances of Personal Loans and Loans Against PPF, you can make an informed decision about which option suits your needs best.

What is a Personal Loan?

A Personal Loan is a type of loan that doesn't require collateral and is approved based on your credit history and capacity to repay the loan using your personal income. It is a versatile loan option that can be utilised for a variety of purposes, such as purchasing the latest smartphone, addressing medical expenses, funding a family member's wedding, or consolidating other loans. However, due to its unsecured nature, personal loans generally carry higher interest rates compared to secured loans like home or car loans. It is crucial to carefully assess your financial situation before considering a personal loan application.

What is PPF?

The Public Provident Fund Scheme, commonly known as PPF, is a popular financial instrument for long-term savings and investments due to its numerous advantages in terms of safety, returns, and tax savings. Launched in 1968 by the National Savings Institute under the Finance Ministry, PPF has become a potent tool for creating wealth over an extended period. Investors steadily contribute to their PPF accounts to build a retirement corpus. The scheme has gained immense popularity, particularly among small savers, due to its attractive interest rates and tax benefits. PPF stands out from other investment options primarily because it offers tax exemption under Section 80C of the Income Tax Act, and the returns generated from PPF are also tax-free.

What is Loan Against PPF?

PPF account holders have the option to obtain a Loan Against PPF using the funds available in their account. This loan facility is provided at an annual interest rate of 1%. Notably, no collateral is required to secure this loan. It is especially beneficial for individuals seeking short-term borrowing solutions without having any assets to offer as collateral. PPF account holders can avail of this loan facility between the third and sixth year after opening their PPF account.

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What are the factors to consider when choosing between Personal Loan and Loan Against PPF?

1. Availability:

A Personal Loan can be obtained quickly, provided you meet certain prerequisites such as a good credit score, age criteria, and stable income. On the other hand, with PPF, you have the option to avail of a Loan Against your PPF account between the third and sixth year after opening the account. For instance, if you opened your PPF account in the financial year 2020-21, you could apply for a loan starting from the third year, which would be the financial year 2022-23. However, you should take note that you can only avail of a Loan Against your PPF account until the sixth year, which would be the financial year 2025-26. It is worth mentioning that the loan approval process for PPF accounts typically takes some time.

2. Borrowing Frequency:

You take out a Loan Against PPF only once per financial year. Even if you have fully repaid a previous loan, obtaining a second loan against your PPF within the same financial year is not permitted. However, that is not the case with personal loans. With personal loans, you can avail of them multiple times within a year, subject to meeting the eligibility criteria and the willingness of your lender to provide the loan.

3. Loan Amount:

When opting for a Loan Against PPF, you can only borrow 25% of the deposited amount. For example, if you have deposited Rs 2,00,000, the maximum loan amount you can avail of is Rs 50,000. However, if you choose to apply for a Personal Loan online, the loan amount you can obtain depends on factors such as your repayment capacity and credit score. Personal Loans can range up to Rs 25,00,000 or even higher, depending on the lender's policy. You can use a personal loan eligibility calculator to determine the maximum loan amount you are eligible for.

4. Loan Tenure:

The repayment period for a Personal Loan can extend up to 6 years. However, for a Loan Against PPF, the repayment period is limited to 3 years from the date of sanction.

5. Interest Rate:

Since there is no collateral, Personal Loans carry high-interest rates, typically ranging from 10% to 20% per annum. Conversely, loans taken against PPF accounts are charged a flat interest rate of 1% regardless of the loan amount. However, you should note that during the loan repayment period, the PPF account does not earn any interest. Therefore, the effective interest rate becomes the prevailing interest rate plus 1%.

Personal Loan vs Loan Against PPF: Which one should you opt for?

When deciding between a Loan Against PPF and a Personal Loan, it is essential to consider your individual circumstances and requirements. As mentioned earlier, the interest rate applied to a PPF Loan is 1% higher than the interest earned on a PPF account. However, borrowers should consider that they will not accrue any interest on the PPF amount used as collateral for the loan. The interest earned on the PPF account is eligible for tax exemption, meaning the borrower will forego the tax benefits on the interest until the entire loan amount is repaid. Furthermore, the PPF account offers the benefit of compounding tax-free returns. By opting for a Loan Against PPF, not only will the borrower lose out on tax-exempted interest, but they will also miss out on the compounding benefits derived from tax-free returns. Since the loan facility is available in the early years of opening a PPF account, this could have a negative impact on the growth of the retirement corpus due to the loss of compounding benefits.

Opting for a Loan Against PPF is favourable if it offers a lower interest rate compared to the Personal Loan you are considering, if the loan amount meets your needs and if you can repay the loan within the stipulated 36 months. However, keep in mind that arranging a PPF loan may take longer than obtaining a personal loan. On the other hand, choose a Personal Loan if you have an urgent need of funds or if the loan amount offered through a PPF Loan is insufficient. It is also advisable to carefully evaluate your options, including checking your bank's pre-approved loan offers, to determine the most suitable choice for your situation.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.