The year 2022 led to a huge rise in lending rates that the banks and financial institutions levy while giving a loan to borrowers. The rise in the interest rates comes after RBI’s repo rate hike trend began in May this year. Benchmarks like MCLR, repo rate linked, and external lending rates all are up. There are two types of loans such as secured and unsecured. One of the most common unsecured loans would be personal loans. But what if a borrower opts for loans against their provident fund accounts? Which is better among the rising interest rates scenario?
Provident funds are one of the savings accounts that can help meet many financial goals in the future, especially retirement. Both salaried employees and their employees contribute to the PF accounts. While withdrawing money from your PF account is quick and easy, however, one can also opt for a loan against this account. One is allowed to withdraw a partial amount from their PPF accounts for short-term requirements, however, certain limits and terms need to be fulfilled before choosing loans against their PPF account.
Meanwhile, personal loans are an unsecured type of lending and hence they do not require any collateral or security. This type of loan is available easily and is also availed on a short-term basis. For once, a personal loan can be opted for funding a holiday, a wedding, to repay your house, or even make an investment. Just like every other loan, personal loans are paid as EMIs which include the principal amount and a certain percentage of interest rates that vary from lender to lender.
As per Pramod Kathuria, Founder & CEO, Easiloan, these are the pros and cons of personal loans and loans against provident funds that can help a borrower make an informed decision.
1. Accessibility:
In the case of personal loans, borrowing money is available easily. There are a plethora of financial institutions as well as private companies’ willingness to provide the same as long as you fulfill certain pre-requisite conditions such as good credit score, age, gender, income obligations, etc.
In the case of PPF, you are eligible to avail of a loan against your PPF account from 3rd to 6th year of the account opening. So for example, if you opened your account in the Financial year of 2015/2016, you are eligible for a loan by the 3rd year which is in the financial year 2017/2018. Also, you can avail loan only
till the sixth year which is the financial year 2021/2022. In addition to this, the loan takes a while to get processed and sanctioned.
2. Loan amount:
With a personal loan, there is no amount constraint on the loan. It may vary according to a bank’s lending parameters.
As for PPF, as per the scheme rules, the amount of loan you can avail cannot exceed one-fourth or 25% of the total amount that was deposited in the account at the end of the 2nd year immediately preceding the year in which the loan is applied for. For example, if you avail for the loan in the financial year 2021, the maximum amount is 25 per cent of the balance in your account in the financial year 2019.
3. Tenures:
Borrowers can avail of personal loans for up to 6 years.
On the other hand, the loan tenure against PPF is up to 3 years.
4. 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, the loan is charged at 1% interest. However, you must know 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%
In December 2022 policy, RBI revealed that the average lending rate has gone up by 117 basis points in May-Oct. The central bank has hiked the repo rate by 225 basis points between May to December 2022 to tame inflationary pressures.
On Monday, RBI released the September 2022 quarterly performance of scheduled commercial banks’ outstanding credit. As per the data, bank credit growth (y-o-y) accelerated further to 18% in September 2022 as compared with 14% a quarter ago and 5.8% a year ago. Meanwhile, personal loans recorded 21.9% growth (y-o-y) in September 2022 — and it accounted for one-third of the total incremental credit during the last one year.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.