Different types of borrowing options are available in the financial world. If you need some extra money, go for the two popular choices: Personal loans and Loans against PPF (public provident Fund). Both have pros and cons; choosing the right option is based on your specific financial need and situation.
Here, are the differences between Personal Loans and Loans Against PPF in simple terms. This way, you’ll have a clearer picture of which option might be best for you when you’re considering borrowing money.
What is a Personal loan?
Personal loans are offered by Non-Banking Financial Companies (NBFCs). A personal loan is a type of loan that you can use for almost any personal financial need. It can be combining debt, covering medical expenses, Travelling, Weddings, making home improvements, or funding a major purchase, a personal loan can provide you with the money you need.
Also, Read: Personal loan balance transfer
What are loans against PPF?
One sort of loan where you can borrow money using the balance in your PPF account as collateral is a Loan Against PPF (Public Provident Fund) loan. PPF account holders can choose this option, which has several special features and advantages.
Understanding the Difference Between a Personal Loan and a Loan Against PPF
| Basis | Personal Loan | Loan against PPF |
| Loan amount | It depends on income and creditworthiness, a higher | PPF balance is limited up to 25% |
| Interest rate | Higher and it is unsecured | Lower, secured against PPF balance |
| Repayment terms | Adaptable, 1 to 5 years | Fixed, It should be rapid within 3 years |
| Accessibility | It is based on income and Credit score | Available to PPF account holders (3 to 6 years) |
| Application | income proof, identity documents | PPF Account details, The Application is simpler |
Which one should you choose: A Personal Loan or a PPF Loan?
For choosing between a Personal Loan and a Loan Against PPF depends on your specific financial situation and requirements. Personal loans offer dynamic ways to use your borrowed money- Whether it is for emergency purposes, a wedding, starting your own small business, home improvements or other personal expenses. It typically allows for higher loan amounts and quicker access to funds, making it suitable for urgent financial needs. Also, it often comes with a higher interest rate. If you need a personal loan you have a good credit score to secure a loan in favourable terms.
On the other side, A loan Against PPF provides a lower-cost borrowing option it is secured against the balance in your PPF Account. Compared to personal loans it provides you with a lower interest rate. It’s limited in terms of the amount you can borrow (up to 25% of your PPF balance). Ultimately, the choice between these two options should consider your immediate financial needs, the amount required, and your ability to manage repayments effectively.
Eligibility Criteria for Loans Against PPF and Personal Loans
Loans Against PPF
- Maintain an Active PPF Account: You must have an active Public Provident Fund (PPF) account with a minimal balance. Public Provident Fund requires an active account
- Time of loan: Loans against PPF can usually be availed between the 3rd and 6th year after starting the PPF account.
PPF Balance: the maximum loan amount is limited to 25% of the PPF account balance after the second year before the application year.
Personal Loans
- Good Credit Score: For a personal loan one of the factors is a good Credit score to qualify for a Personal Loan with favourable terms.
- Stable Income: You need to show a stable source of income to ensure you can repay the loan in a timely
- Age Criteria: The age range of personal loans is between 21 to 65
- Documents required: identity proof, address proof, income proof (like salary slips or tax returns), and sometimes bank statements.
Impact on Credit Score: Loans Against PPF vs Personal Loans
Loans Against PPF
Obtaining a loan against your PPF (Public Provident Fund) does not have a direct impact on your credit score because PPF loans are secured against the balance in your PPF Account it is not based on creditworthiness. It is not going to affect your credit score if you repay your loan timely.
Personal Loans
On the other hand, can significantly impact your credit score depending on how you manage personal loans:
- Positive Impact: Timely payment boost and increase your credit score,
- Negative Impact. Missing payments or delays in payments on personal loans can decrease your credit score. If this happens, lenders report your loan status to bureaus, and this will affect your creditworthiness negatively.
Which Loan Option is Better for You?
Both a personal loan and a loan against PPF offer various advantages depending upon factors like the loan amount, repayment tenure, and your financial profile. But when you are in need of funds, it’s important to choose the correct option according to your financial circumstances. Here is a comparison of both loan options under different conditions.
1. If you need a large amount of money:
-
- Personal Loan: The loan amount that you can borrow in a personal loan depends on your credit score, income and your repayment capacity. So, it offers a higher borrowing limit than in loan against PPF.
- Loan against PPF: The amount of funds that you can borrow in a loan against PPF is limited to an amount of 25% of the balance in your PPF account at the end of the second financial year before the year you will apply for the loan.
2. If you Have a Good Credit Score:
-
- Personal Loan: If you have a good credit score, you can get the loan at a lower rate of interest and better conditions. Lenders are more willing to negotiate the conditions for a creditworthy person.
- Loan against PPF: In this case, the credit score does not matter, as this loan can be availed by pledging the balance in your PPF account as collateral.
- The interest rates are also not affected by the higher credit score due to the PPF balance being the collateral in this case.
3. If You Want Flexibility in Repayment:
-
- Personal Loan: This option provides more flexibility. The tenure for repayment ranges from 1 to 7 years, and many repayment schedules are available. Your repayment plans can be customised according to your financial situation.
- Loan against PPF: The repayment rules are stricter. The principal amount of the loan has to be repaid in 3 years, and after that, the interest has to be paid in one or two instalments.
4. If You Have a PPF Account:
-
- Personal Loan: A PPF account is not required in this case as it completely depends on your income and capacity to repay, which is evaluated by the lender according to your credit history.
- Loan against PPF: This loan option is available for those who have a PPF account. If you want to protect your savings, this option is ideal as it allows you to use your PPF account balance as collateral and provides you with a loan at lower interest rates.
In conclusion, a personal loan is an ideal option for those who need a loan of a large sum with flexible repayment options. Whereas, a loan against PPF is an ideal option for those who need a loan of a smaller amount. This loan is a cost-effective choice since it is backed by your PPF balance, making it available at a lower interest rate compared to a personal loan. The right choice completely depends on your needs and financial situation.
Additional Factors to Consider
1. Tax Implications of Both Loan Types:
-
- Personal Loan: In this case, tax implication depends on the purpose for which the funds are being used. The loan amount is not considered taxable income unless the funds are used for purposes like business investment and home renovation.
- Loan against PPF: As the loan is taken against the PPF balance, the income from this loan has no direct tax implication.
2. Prepayment and Foreclosure Options:
-
- Personal Loan: Prepayment policies vary from lender to lender. Some of the lenders charge penalties for prepayment, while some allow you to prepay without any fees, especially if you have a good credit history.
- Loan against PPF: You can prepay the loan without any penalty or extra charges. The terms of the prepayment and interest are predefined, making it simpler for you to make a decision according to your financial circumstances.
3. Processing Fees and Other Charges:
-
- Personal Loan: The processing fees are high (1-3% of the loan amount) with other additional charges.
- Loan against PPF: Very low processing fees or administration charges as the loan is backed by your PPF balance.
4. Loan Approval Time:
-
- Personal Loan: Approval time is comparatively quick. It gets approved within 24-48 hours, especially for pre-approved customers and the ones with good credit history.
- Loan against PPF: Approval in this case takes a long time because the verification of your PPF account has to be done, and the lender has to contact the Post Office or the bank in which you have your PPF account. It can take a few days to a week to get approved.
By comparing these additional factors, you can determine the convenience, cost, and time needed to approve both options. After evaluating these factors, you can make an informed decision based on your financial needs.
What are the tax benefits of a Personal Loan compared to a Loan Against PPF?
Tax benefits are offered in a Loan against PPF, whereas personal loans generally do not provide any tax benefits.
Personal Loan:
The interest paid on a personal loan is not eligible for tax deduction. However, if the funds from the loan are used for specific purposes, such as home renovation, business investment, or education, they are eligible for tax deduction.
Loan Against PPF:
In a loan against PPF, the amount borrowed, and the interest amount are not taxable. The PPF scheme also offers tax exemptions on returns generated.
Can you switch from a Personal Loan to a Loan Against PPF?
You cannot directly switch from a personal loan to a loan against PPF. You can consider an option to take a loan against PPF to repay your personal loan. The switch is not directly possible as these two loans are of different types and have different eligibility criteria and purposes. However, leveraging a loan against PPF to clear off your personal loan can be an effective strategy if you carefully evaluate the terms and limits of the PPF loan before applying for it.
How does taking a Loan Against PPF affect my PPF maturity benefits?
When you take a loan against PPF, it does not affect your PPF maturity benefits. As the borrowed amount is just a percentage of your PPF balance, it does not reduce the interest earnings on your PPF savings.
- Principal and Interest Remain Intact: The PPF balance in the account continues to earn interest at the same rate set by the government. And as the loan amount is just a percentage (up to 25%) of the PPF balance, taking a loan does not affect much the interest earnings.
- No Impact on Tax Benefits:
The PPF account retains its Tax-free status, which means that the tax will not be deducted from any earnings through the interest and maturity proceedings even if you take a loan against it.
- Repayment amount:
When you have taken a loan against PPF, you have to repay the amount of the loan within 3 years, along with the interest. As soon as you repay the amount, it goes back into your PPF account to ensure that it remains unaffected in the long term.
- Withdrawal Restrictions:
You may face restrictions on withdrawing any money from your PPF account while the loan is active till the time the whole loan amount along with the interest is repaid.
In conclusion, a loan against PPF provides you an opportunity to access funds without disturbing your long-term savings and tax benefits.
Can I Get Multiple PPF Loans?
No, you cannot take multiple PPF loans at the same time. You can only take one loan against the PPF in a year during an eligible period that is between the third and sixth year of the PPF account.
Can I Close My PPF Account After Taking a Loan?
No, you cannot close your PPF account while your loan is active. Before closing a PPF account, you must fully repay your loan amount, including the interest. Also, there are some eligibility conditions for premature closure of a PPF account:
- Premature closure of a PPF account is only permitted after the account has been active for 5 years.
- Specific circumstances are mentioned in which you can apply for premature closure of your account, i.e., serious medical emergencies or higher studies of the account holder or the account holder’s children.
So, you can close your account prematurely under the eligible circumstances, but only after you have fully paid your Loan against PPF.
Making the Right Choice: Factors to Consider When choosing Between a PPF Loan and a Personal Loan
- Personal Loan: Best for larger amounts, quicker access, flexible usage, and terms, but comes with higher interest rates and impacts your credit score.
- PPF Loan: Ideal for smaller, low-interest loans, doesn’t affect your credit score, but is slower to process and has specific eligibility criteria.
Also, check:
