Compare the benefits of Personal Loan vs Loan Against PPF, and understand which option suits your financial needs better. Learn about rates, terms, and eligibility.

Choosing Between a Personal Loan and Loan Against PPF

To help illustrate the decision-making process between a personal loan vs loan against PPF, let’s consider an imaginary scenario featuring Neha, who needs ₹30,000 to furnish her newly renovated home.

Neha has finally finished the major renovations on her dream home. However, the joy of accomplishment is tinged with a touch of financial worry. Unexpected expenses during the construction phase have left her short by ₹30,000 for furnishing the interiors. 

Neha considers two options: taking a personal loan or taking a loan against her Public Provident Fund (PPF). Both loan options have their pros and cons, and understanding these can help Neha make an informed decision. Though, Neha needs a quick and hassle-free solution to bridge this gap. Should she opt for a readily available personal loan or tap into her Public Provident Fund (PPF) account through a loan against PPF? 

Let’s delve into these options to understand which would be more beneficial for Neha. 

Understanding the loan options

• Personal Loans – Personal loans are unsecured loans offered by banks and NBFCs (Non-Banking Financial Companies). They require minimal documentation and offer quick disbursal of funds. However, convenience comes at a cost – personal loan interest rates tend to be higher than secured loans. With Zapmoney, Neha could apply for a personal loan ranging from ₹1,000 to ₹1,00,000. The interest rates for personal loans from Zapmoney vary between 18% to 36% per annum.  
• Loan against PPF – A loan against PPF is a facility offered by banks where your PPF account itself acts as collateral. This translates to significantly lower interest rates compared to personal loans. The current interest rate on a loan against PPF is pegged at 1% above the prevailing PPF interest rate. Assuming Neha had a sufficient balance, she could easily get the ₹30,000 which she needed. The current PPF interest rate is 7.1% per annum, and the loan against PPF would be charged at 8.1% per annum (1% above the PPF rate). The maximum loan amount she can avail is up to 25% of the PPF balance at the end of the second year preceding the year in which the loan is applied for. That means, if she has a balance of ₹1,20,000 in her PPF, she can get a loan of up to ₹30,000, precisely the amount she needs.

Making the Choice: A Comparative Analysis

Loan Amount:

• Personal Loan: The loan amount depends on your creditworthiness and income. You can potentially secure a loan amount that covers your entire shortfall (₹30,000) and maybe even more.
• Loan Against PPF: The loan amount is capped at 25% of your PPF balance. Let’s say Neha has ₹2 lakh in her PPF account. In that case, the maximum loan she can avail through this route is ₹50,000, comfortably covering her deficit and potentially allowing for some additional furnishing expenses. 

Transaction and Documentation:

• Personal Loan – Personal loans are known for their ease of application. Documentation typically involves ID proof, address proof, income proof (salary slips or bank statements), and sometimes even ITRs. The application process can often be completed online, and loan disbursal can happen within a few days of approval. Personal loans are relatively easy to obtain with minimal documentation. For pre-qualified customers, the entire process can be completed online, and the loan amount can be credited within hours.
• Loan against PPF – The process for a loan against PPF is generally simpler than a personal loan, especially if you have an existing relationship with the bank managing your PPF account. Minimal documentation is required, and approval is often quick. However, obtaining a loan against PPF requires specific documentation such as a loan form and KYC documents, while the process is straightforward if the papers are in order. The loan can be processed in at least two days.

Structure of Repayment of Loans:

Personal loans from Zapmoney offer flexible repayment options, typically in the form of Equated Monthly Installments (EMIs). Neha can choose a tenure that suits her financial situation, allowing her to manage her monthly outflows efficiently. Additionally, personal loans often come with prepayment options, though some lenders may charge a penalty for early repayment. 

On the other hand, a loan against PPF has a straightforward repayment structure. Neha would need to repay the principal amount first within the stipulated tenure of 36 months, followed by the interest. There are no EMIs, and the borrower must adhere to the fixed repayment schedule set by the PPF regulations. 

For Neha, both options have their pros and cons. A personal loan offers flexibility in terms of loan amount and tenure but comes with higher interest rates. On the other hand, a loan against PPF offers a lower interest rate but has a shorter repayment period and specific eligibility criteria. Neha needs to weigh these factors based on her financial situation and repayment capacity to make an informed decision.

While a loan against PPF won’t affect your credit score. However, applying for a personal loan will leave an inquiry on your credit report. These inquiries can slightly lower your credit score, especially if you have a limited credit history or multiple loan applications in a short period. If your credit score is already low, multiple inquiries could make it even harder to qualify for a loan with a favorable interest rate. 

Conclusion

A personal loan or a loan secured by PPF must be chosen after carefully weighing numerous factors. Although personal loans have more stringent verification requirements and higher interest rates, they provide flexibility in terms of loan quantity and duration. On the other hand, a loan secured by PPF has a fixed repayment schedule and a reduced interest rate, but it is restricted by the PPF balance.