There are various distinct kinds of loans, and it may be difficult to select the kind of loan, which is the correct match for you. Every kind of loan is geared to a particular kind of borrower to match their varying needs. For instance, the terms of home loans are drafted to cater for those who want to purchase a home. However, in specific cases, it is not always this defined. In particular situations, you might be confused among distinct options. Several borrowers may be confused between loans against public provident funds and personal loans. What must you opt for? 

Here in this article, the cover is everything you must know to make an informed decision. 

What is meant by a loan against a public provident fund?

Before you dive deep into the loan against the public provident fund option, understand what PPF is. The full form of PPF is a public provident fund. This is a retirement scheme provided by the government of India and introduced in the year 1968. Primarily, you as an individual can commit to putting a small percentage of your monthly income into this instrument called PPF to meet your retirement day’s expenses. PPF account will offer interest on the saved funds. Thus, by the time you get nearer to retirement, you will have a considerable corpus in your PPF account, which you can use for your post-retirement days. The maximum amount you can invest in getting tax benefits on the public provident fund is Rs 1.50 lakh. Moreover, the amount that you place into your public provident fund is thoroughly tax deductible, which makes it extremely lucrative. A public provident fund loan is a credit option provided to you against your public provident fund savings or investments. For instance, let us suppose you require Rs 15 lakh for your home renovation. Suppose you saved about Rs 15 lakh in your public provident fund account over years. But you cannot take out this money until the lock-in period ends. Lock-in restriction means that you will be charged for withdrawing the funds in your PPF. In this scenario, you can borrow a specific sum secured against PPF and repay a low amount in the form of interest as the credit option is secured in nature. PPF rate of interest is only 2 per cent more than the generated interest by the public provident fund account. Thus, this is very cost-effective. 

What is meant by a personal loan?

A personal loan is a kind of unsecured loan. This means that you do not require providing any asset or collateral in the form of security. Personal loan of any amount, may it be 5 lakh personal loan or above, can be taken up as per your financial requirements. In case you are unable to get an instant personal loan from bank lenders, then you can consider availing of personal loans from NBFCs or digital lenders like Cashbean personal loan, LoanTap personal loan, etc. Through such lenders, you can avail of personal loans instantly. Lenders decide to provide you with a loan based on different parameters like your financial credibility, identity, location, income, etc. If you are qualified financially for a personal loan, then you can take up the loan in just a matter of a few hours. 

A personal loan is generally an instant gateway for accessing instant liquidity. This enables you to borrow a smaller amount considerably with zero hassle. One of the major benefits of availing personal loan is that you can use the loan for any purpose. You can use this loan to pay for your wedding and your medical exigencies, perform home repairs, renovate your home, and the list continues. Note that a lender will never ask you to provide any reason for placing an application for personal loan. This is because there is no end usage restriction on the loan proceeds disbursed by lenders in the case of a personal loan. 

Loan against public provident fund vs personal loan

Here in this specific, let’s better understand the benefits and drawbacks of availing small loans like loans against public provident funds and personal loans so that you can conduct an informed decision. 

Also Check: Cashbean Personal Loan

Loan repayment 

The maximum loan repayment tenure of a personal loan may be higher as compared to the maximum repayment tenure allowed on loan against a public provident fund. Generally, the maximum repayment of a personal loan is nearly five years, while a loan against a public provident fund is only three years. As the repayment tenure of a personal loan is higher, this means that your monthly payments or your EMI may be relatively lower. This can make it simpler to pay off a personal loan as compared to a loan against a public provident fund. 

Rate of interest

The rate of interest of a personal loan may be higher than a loan against a public provident fund. The personal loan interest rate can differ depending on the lenders. Your credit score and documents can make a massive difference to the rate of interest charged. Generally, the rate of interest on personal loans ranges anywhere between 10 per cent per annum and 24 per cent p.a. 

On the contrary, the loan against public provident fund’s interest rate may be as low as 8 per cent per annum. As stated previously, the loan against a public provident fund is only 2 per cent higher as compared to the interest yield of the public provident fund account. 

Collateral or security

Collateral or security is the asset or security that you offer to the bank or digital lender in exchange for the credit option. When you offer any security, this means that in the case of any failure to make repayment of the loan EMI, the lender has full right to take possession or ownership of the security provided to them. A personal loan does not need any collateral or security and is thoroughly unsecured in nature. You can take up a personal loan simply on the basis of your monthly income.  But in the case of a loan against a public provident fund, the loan option is secured in nature. The collateral or security for loan is the fund that you hold in your public provident fund. In the scenario you fail to make the loan repayment, the lender may easily recover the difference in money through your public provident fund account. 

Bottom line

It is obvious that both loans against public provident funds and personal loans are small loans with specific pros and cons. While the rates are higher in the case of personal loans, you do not require providing any collateral or security, and they can be processed and disbursed instantly. The decision to avail of either kind of loan is based on your needs and circumstances. Overall, a personal loan may be flexible, hassle-free and faster with a longer tenure available, while a loan against a public provident fund can be cost-effective as the interest rate charged on this loan is low owing to its secured nature.