With modern financing solutions, dealing with a cash crunch has become much more manageable. You can either go for the popular unsecured personal loan, a quick and easy solution or you can dip into your investments or savings instruments like the provident fund, which also grant you access to a loan. You can get a loan against your PPF (Public Provident Fund) or EPF (Employees’ Provident Fund) account.

While both are viable options, they have their own set of pros and cons. As a borrower, it is vital to know about their features to make a sound decision. To understand how to choose between a personal loan vs a loan against provident funds, read on.

Check the interest rate on both loans

As you know, there is no need to pledge collateral when availing of a personal loan. While this makes borrowing more effortless, you may end up paying a higher interest rate. Lenders usually charge interest rates between 9.50% and 21% [EW1] or more.

While availing a loan against your provident fund account may involve a longer process, its rate is quite minimal. You may be surprised to see that you pay only a 1% interest rate on this loan. However, remember that you are only eligible for interest earnings once you repay the loan.

This means that the effective interest rate on your loan against the PPF account is 1% added to the rate at which you earn from your account. With this in mind, you can compare both loans and choose the appropriate one to finance your needs.

Consider the ease of borrowing

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This is one of the essential factors to consider when availing of loans as you may either need financing for planned expenses or during emergencies. Remember, getting a personal loan is quicker than availing a loan against your provident fund account.

If speed is a factor, consider personal loans as you will be spoilt for choice with several lenders and deals flooding the financial marketplace. All you need to do is to meet the eligibility parameters set by the lender, and you are good to go.

In contrast, availing of a loan against provident funds needs you to follow certain processes.  You can get a loan only between the 3rd and 6th year of opening a provident fund account. For instance, if you open a PPF account in the financial year of 2021-22, you are eligible to apply for a loan only by the third year, 2023-24, and until the sixth year, 2027-28.

While these terms can seem limiting, a loan against your provident fund account is a good solution if you don’t have much of a credit history or are unemployed. So, it can be a suitable option if you cannot qualify for a personal loan. 

Check the maximum loan amount

There is no restriction towards how much you can borrow via personal loan. However, the sanctioned loan amount varies per the lender’s cap and your eligibility. Usually, lenders offer anywhere between ₹1000 and ₹40 Lakhs as a personal loan.

This is not so when you consider a loan against a provident fund account. You can only avail of a loan up to 25% of the total amount you have available in your account at the end of the second year if you plan to borrow during the third year.

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So, if you plan to take a loan in the financial year 2023-24, the amount you borrow cannot exceed one-fourth or 25% of the balance present in your account as of March 31, 2022.


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