PPF loan and personal loan, both options give you access to quick cash, but the costs and benefits differ sharply.
Why borrowers weigh these two options
With increasing festival spending and large-ticket purchases this time of year, many turn to loans to finance the differential. Two methods that people commonly turn to are taking a loan against your Public Provident Fund (PPF) or taking a personal loan. Both give you liquidity but how you go about it, the cost of it, and the risk involved in both options are highly dissimilar.
What is loan against PPF composed of?
PPF loan allows you to take 25 percent of your account value as loan. The rate of interest is also usually just 1-2 percent more than the PPF rate of 7.1 percent. You repay the loan within three years, and you can take one such loan in a year. Since it is collateralised against the balance in the PPF account, the risk is minimised, and the account also earns interest if the instalments are made on time.
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What personal loans offer
Personal loans are unsecured. They're approved in your name based on your salary and credit history rather than on savings you've accumulated. The quantum can be much higher—into lakhs—and the choice of usage free and wide-ranging, ranging from weddings and education to medical bills or vacations. The tenure is between one year and five years, but the interest rates begin at around 10 percent and can be much higher.
Key trade-offs to consider
The largest draw of this type of loan is affordability. The interest is low, and you're lending against your own funds. The loan limit is small though, and the process may take longer because it's dealing with paper work with the post office or bank at which you hold your account. Personal loans move faster though, sometimes done online, and may be done more than once per year. The drawback is the expense—higher interest and the potential for hurting your credit history in the event of missed repayments.
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Which do you prefer?
If it's short term and the quantum involved is small, making a loan against PPF is worthwhile. It's less expensive and lighter on the finances. But if you require more money or desire more liberty in how you utilize it, a personal loan is better—though you must be careful about the burden of interest.
The bottom line
Both alternatives exist. PPF loans can be used well for small short-term requirements, and personal loans are appropriate for larger objectives. The choice depends on how much you require, how soon you need it, and whether you can afford higher costs of interest or not.
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