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

Ideally one should avoid taking a loan unless it's for acquiring long-term assets, to enhance income potential or to reduce expenses.

Ideally one should avoid taking a loan unless it’s for acquiring long-term assets, to enhance income potential or to reduce expenses. For unforeseen emergencies, one should have an emergency fund in place. However, despite having things at place as per a proper financial planning, one may still need money.

“Despite planning and accounting for every rupee, you could be faced with circumstances where a little financial assistance is required. A personal loan could go a long way in easing the short-term financial crunch. Or one could also borrow against a Public Provident Fund (PPF),” said Prithvi Chandrasekhar, Head, Risk & Analytics, InCred Finance.

If you have to make a choice between the personal loan and loan against PPF, what should be your pick?

To compare the pros and cons of the two, Chandrasekhar lists the following aspects, which would help you make an informed decision.

How does good and bad credit history affect your prospects of securing a loan on favourable terms?

Access

A personal loan is available quickly as long as you fulfill certain pre-requisite conditions such as healthy credit score, age, steady income, etc. With PPF, you’re allowed to avail a loan against PPF account from 3rd to 6th year of PPF account opening. This means if you have opened your PPF account in FY15-16, you’re allowed to avail a loan by the 3rd year i.e FY17-18. You will be eligible to avail for a loan only till the sixth year -i.e., FY20-21. And the loan takes a while to get sanctioned.

Loan amount

With a personal loan, there is no ceiling to amount of loan you can avail. It may vary according to a bank’s lending parameters. But largely, as long as you fulfill the pre-requisite stipulations, there shouldn’t be a problem with the quantum of loan you avail. In the case of PPF, there is a caveat attached to the loan amount that can be procured. According to the scheme rules, the amount of loan you can avail should not exceed 25 per cent of the amount that was available in the account at the end of the second year immediately preceding the year in which the loan is applied for. For e.g.- If you avail for the loan in FY21, the amount cannot exceed 25 per cent of the balance in your account in FY19.

Loan tenure

A personal loan can be availed for up to 6 years. In the case of PPF, the loan has to be repaid within 3 years of sanction.

Interest rate

Since a personal loan is unsecured, the interest rates on the same are very high. They could range between 10-20 per cent per annum. With PPFs, any loan taken against the account is charged at 1 per cent interest, irrespective of the amount. However, you must understand that your PPF account does not earn any interest till the loan is repaid. Thus, the effective rate of interest is the prevailing interest rate + 1 per cent.

“Loan against PPF is the way to go when you require a small amount for a short period of time. When the use case entails flexible time periods and requires a substantial amount, then personal loan is a better fit,” said Chandrasekhar.