The nationwide lockdown due to spread of coronavirus has led to salary cuts, leave without pay and at worst job losses with most individuals struggling to pay water, electricity and mobile bills, EMIs, children's school fees and other day-to-day necessities.
While the Reserve Bank of India and the government have come forward to rescue individuals by allowing EMI moratorium on term loans and partial withdrawal from the EPFO, it may not be enough for all or might not be applicable to all. If you consider to take loan to meet this temporary shortage of funds, you have a cheaper loan option that you can avail at just 1 per cent. Let's understand how:
Loan against PPF account
Not many know that if you have a PPF account, you can take loan against it at just 1 per cent. However, you get eligible for it only in the third year since opening the account, and the loan window closes after the expiry of the sixth year, that is, loan will be available only between third and sixth year since opening the account. From seventh year onwards, you can make partial withdrawals from your PPF account.
Although you pay only 1 per cent interest on the loan amount, the effective interest rate turns out to be much higher since PPF investments worth the loan amount do not earn interest until the loan is repaid. Earlier this month, the government reduced the interest rate on PPF from 7.9 per cent to 7.1 per cent. Hence, if you borrow money from your PPF account now, your effective interest rate will turn out to be 8.1 (7.1+1) per cent.
Also note that you can only withdraw 25 per cent of the balance in the PPF account at the end of the second year immediately before the year in which you apply for the loan. For example, if you apply for the loan in financial year 2015-16, you will receive 25 per cent of the balance as on March 31, 2014.
The following table explains it better:
Besides, loan can be taken only once in a year and second loan can be taken only after the full payment of the first loan. "Neither do borrowers have to pledge any security for the PPF loan nor does the application depend on their credit score," says Adhil Shetty, CEO, Bank Bazaar.
How to repay the loan
You need to repay the principal amount of the loan in 36 months. Either make the lumpsum payment or in two or more monthly instalments. After principal is paid, interest on loan should be paid in maximum two instalments. If you don't make timely repayments, you will be charged 6 per cent on your loan outstanding.
Should you take loan on PPF amount?
Loan from the PPF account is indeed cheaper than any other personal loan, but it should not be your first choice. This is a long-term product meant to help you meet the funding requirement of a major life goal. Consider PPF loan only if you don't have any other means to borrow. "Ideally no essential long-term investment should be liquidated to raise money, but if no other choices are left, you can go for it since interest rate will be lower than other financing facilities like a personal loan," says Shetty of Bankbazaar.
There is another limitation with this option as the loan amount may not be sufficient for many borrowers. "Taking loans from PPF is not a good idea as the loan amount is limited to smaller amounts due to the fact that you can only take a loan of 25 per cent of the balance in the account and there are restrictions on the year in which you can take the loan. Further, during the loan period, the account doesn't earn any interest and hence one will lose out on the compounding benefits and will end up with much lower returns," says Mrin Agarwal, founder, Finsafe India.
If you do borrow from your PPF account, you must ensure that you repay the loan at the earliest because unless you don't pay back, your PPF investments worth the loan amount will not earn any tax-exempt interest. "PPF investments often form the backbone of our critical long-term financial goals and any laxity could prove to be counterproductive to those goals," cautions Shetty.
How to apply for the loan
First, you should visit the website of the bank where you have the PPF account. It will showcase your loan eligibility. If you have to apply for the loan, you need to submit a Form D to the respective bank or post office which operates your PPF account. Most banks will offer you online facility to submit the form, however, in some cases, you may have to visit the home branch. "The application process (whether online or offline) and turnaround time could differ depending on the lending bank or the post office," says Shetty.
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