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Loan against PPF or Personal Loan – Which Option Should You Opt For?

There are distinct kinds of loans, which may make it tough for you to select from. Every loan type is geared to a particular kind of borrower. For instance, HDFC personal loan terms may be drafted to cater for the ones looking to avail a loan proceeds instantly through their app while SBI personal loans may be offered at lower personal loan interest rates to just those with a credit score of 750 and above. However, in specific cases, it may not always be as defined. In specific scenarios, you might be confused among 2-3 distinct loan options.

So, there may be distinct loan borrowers that may be confused between loans against PPF (public provident fund) or personal loans. What should you choose? Here in this blog, discussed are the difference between the two products namely loan against PPF and personal loan to help you make a better decision.

What’s a loan against PPF?

Before diving deep into understanding all about loan against PPF, let us try and understand what’s PPF. PPF is the short form for Public Provident Fund. This is a retirement financial option provided by the government and was started in the year 1968. Basically, individuals can commit to putting a percentage of their earnings (monthly) into their Public Provident Fund. Your PPF would return the interest constituent on the amount saved. Thus, by the time you near retirement, you hold a considerable corpus in your PPF, which can be utilised for post-retirement.

The highest amount on PPF that you can invest has a limit of Rs 1.50 lakh. Moreover, the amount you contribute towards PPF comes with tax benefits as per Section 80 C, making this option a highly lucrative choice for you to save for your retirement days.

A loan against PPF basically is a credit option against your investments or savings in PPF. For instance, let us assume you require a fund of Rs 15 lakh for renovating your home. If in your PPF account, you have invested over Rs 15 lakh, then you may opt for this option. However, the lock-in restriction infers you may be penalised for the amount withdrawn. In such a scenario, you can take up a sum against your public provident fund and pay a low amount in the form of an interest constituent owing to the secured nature of the loan.

The interest rate on a loan against PPF is only 2 per cent over the interest constituent generated by your PPF account. Thus, it is extremely cost-effective.

What’s a personal loan?

A personal loan is basically an unsecured credit option. An unsecured credit option infers that you do not require offering any security or collateral for availing the loan proceeds. You can take up a personal loan quickly. Lenders ensure to make the lending decision depending on your financial credibility. Hence, lenders tend to check out your financial statements, credit score, monthly income, and others. In the case, you are qualified financially for availing the loan, then you may get the loan proceeds in just a matter of a few hours. A personal loan usually is an instant gateway for availing instant liquidity. This option permits you to take up loan proceeds of up to Rs 40 lakh to meet your financial exigencies, and mismatches, without any hassle.

One of the major benefits of availing a personal loan is you can use the loan proceeds for any purpose. You can use the loan to pay for the wedding, renovate your home, pay for your medical exigencies, conduct home repairs and others. The financial institution will not ask you to list down the reason for placing the application for a personal loan.

Loan against PPF vs. personal loan – Which one is a better choice?

Here in this section, let us understand the benefits and drawbacks of loan against PPF and personal loans for making an informed decision.

Loan repayment tenure – 

The highest personal loan repayment tenure can be higher than the tenure allowed on a loan against PPF. Generally, the maximum personal loan tenure falls between 5-7 years while the loan against PPF has a tenure of just 3 years. As the personal loan repayment tenure is longer, it means the monthly loan instalment payments or EMI can be considerably lower. This can make it simpler for you to repay your personal loan than a loan against PPF.

Rate of interest – 

The rate of interest of a personal loan may be higher than a loan against PPF. The personal loan rate can differ depending on the loan providers. Your own credit score and documents for both loan products are different too. While the rate for personal loans usually is over 10 per cent per annum, a loan against PPF has a rate of interest below a personal loan of anywhere around 9.1 per cent i.e., 2 per cent over the PPF interest rate.

Collateral or security – 

Security or collateral infers the asset that you offer to the financial institution in exchange for a loan. When you offer security or collateral, this means that in case you fail to make a loan repayment, the financial institution can take possession and ownership of the security. A personal loan does not need any collateral and is a totally unsecured loan. You can get a personal loan depending on the monthly income without the need for providing any security.

However, a loan against PPF by nature is secured. The loan security is the fund that you hold in your PPF. In the case you fail at repaying the loan, the lender can simply recover the difference from your PPF.

Ending note – 

It is obvious both loan against PPF and personal loans are small credit options that come with their pros and cons. While the rate of interest is higher for a personal loan, you do not require offering collateral or security and they can be simply disbursed in no time. The decision to opt for any of the loan types depends on your needs and circumstances. Overall, a personal loan may be faster, flexible, stress-free, and hassle-free with better repayment tenure while a loan against PPF may be highly cost-effective.

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