Ideally, one should avoid taking out a loan, except to acquire long-term assets, to increase income potential, or to reduce expenses. For unforeseen emergencies, you need to have an emergency fund in place. However, although things are in place with proper financial planning, there may still be a need for money.
âDespite planning and accounting for every rupee, you might be faced with circumstances where a little financial help is needed. A personal loan could go a long way in alleviating the financial crisis in the short term. Or we could also borrow against a public provident fund (PPF), âsaid Prithvi Chandrasekhar, head of risk and analysis, InCred Finance.
If you have to make a choice between personal loan and PPF loan, what should be your choice?
To compare the pros and cons of the two, Chandrasekhar lists the following aspects, which will help you make an informed decision.
How does good and bad credit history affect your chances of getting a loan on favorable terms?
A personal loan is available quickly as long as you meet certain prerequisites such as good credit rating, age, stable income, etc. With PPF, you can benefit from a PPF account loan from the 3rd to the 6th year of PPF. account opening. This means that if you opened your PPF account in FY15-16, you are eligible for a loan in the 3rd year i.e. FY17-18. You will only be able to get a loan until the sixth year, which is FY20-21. And the loan takes a long time to be sanctioned.
Amount of the loan
With a personal loan, there is no limit to the amount of the loan that you can receive. It can vary depending on a bank’s lending parameters. But for the most part, as long as you meet the prerequisites, there shouldn’t be a problem with the amount of the loan you are granted. In the case of the PPF, a caveat is attached to the amount of the loan that can be obtained. According to the rules of the scheme, the amount of the loan that you can avail must not exceed 25 percent of the amount available in the account at the end of the second year immediately preceding the year in which the loan is requested. For example, if you get the loan in FY21, the amount cannot exceed 25 percent of your account balance in FY19.
term of the loan
A personal loan can be used for up to 6 years. In the case of the PPF, the loan must be repaid within 3 years of the sanction.
Since a personal loan is unsecured, the interest rates on the same are very high. They could vary between 10 and 20 percent per year. With PPFs, any loan taken on the account is charged at 1 percent interest, regardless of the amount. However, you should understand that your PPF account does not earn any interest until the loan is paid off. Thus, the effective interest rate is the prevailing interest rate + 1 percent.
âThe PPF loan is the way to go when you need a small amount for a short period of time. When the use case involves flexible time periods and requires a substantial amount, the personal loan is more suitable, âsaid Chandrasekhar.